We thought the ANZ result was excellent. The market disagreed. This has happened quite a bit, of late!
Firstly, the numbers.
Capital buffers continue to be excellent. The banks are in much stronger position than they were pre-GFC.
Above is CET1 ratios, below, capital adequacy.
Returns have improved, from the pandemic, a function of a)
…improving net interest margins, and b)
…very low to no credit issues. The argument of the past few years has been whether ANZ has been “too conservative”, but we find that trait admirable, in the present environment.
Looking at share prices, indexed against forecast earnings, we can see that a) earnings are being upgraded, and b) the shares are being marked down.
The market is worried that rising rates trigger a consumer slowdown leading to a rise in bad and doubtful debt charges.
We agree! But to us, there’s a bit of a break in the logic. The banks will benefit from higher net interest income, from rising rates, but may lose given rising insolvencies. That seems asymmetric. Of course, banks have leverage, so you might argue that of course it should be asymmetric. Small gains, lots to lose, say the bears. At which point it comes back to “well, what price are you paying for this bet, and what carry are you getting in the interim”. And, well, the carry is enormous and the multiple is low (excluding CBA!).
So far, the consumer is in rude health, indeed too strong, hence the rising rates. We think we’ll see the consumer stocks downgrading first, and so, from a relative performance perspective, feel the banks should do okay given that the feared scenario is unambiguously bad for retail, or for home builders, but is ambiguously bad for banks.
Again, it isn’t a slam dunk, but, to us, there aren’t that many pockets of the market that look great. Tech is overvalued, much of health care is in negative earnings momentum mode from COVID fading, and is also expensive, REIT’s will suffer from widening cap rates, commodities and energy are at the whim of US monetary policy, China, and the fate of an unpredictable despot, and the consumer is, well, outlined in detail above.
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