We outline our case for why investors should be market weight the major banks. This month, the mini bank reporting season is now complete, following updates from all four major banks. Results were well received by the market with the major banks outperforming the S&P ASX 200 so far this month.
Looking ahead, we see the ‘bull and bear’ arguments towards the banks as being balanced. We see the sector as being on the slightly cheaper side of fair value from a valuation perspective.
One of the key sector headwinds - being net interest margins - has the potential to ease this year with the likelihood of higher cash rates from the RBA, perhaps as soon as August 2022.
A move to higher local rates would likely be well received by the market. As of now, the market does not believe there will be any relief on margins out to 2024E, which we see as being too pessimistic.
Additionally, the intense competition, particularly for new mortgages, could start to fade as the rate cycle turns upwards and the cheap funding the banks have benefited from over the past 18 months fades.
However, the timing and magnitude of any benefit remain uncertain. Also, bank interest margins are likely to remain under pressure, with another period of falling margins ahead potentially providing ammunition for the bears on the sector.
The Wilsons Australian Equity Focus is market weight the bank sector, with our order of preference being National Australia Bank (NAB), Westpac Bank (WBC), ANZ Bank (ANZ), and Judo Bank (JDO).
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Written by
John Lockton, Australian Equities
John is a leading investment strategist with 20 years experience.