The shock election victory for the Coalition has had a hugely positive impact on the Commonwealth Bank of Australia (ASX: CBA) share price and National Australia Bank Ltd (ASX: NAB) shares price today.
About CBA & NAB
CBA and NAB are two of the ‘Big Four’ Australian banks, along with Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC). CBA has 14.1 million Australian customers and a 24% share of the mortgage market, while NAB is Australia’s largest lender to businesses.
Why The Banks Are Up?
With a Coalition victory, it would seem any chance of franking credits changing has gone out the window.
Banks have traditionally been a staple investment for investors wanting reliable dividends with a decent dividend yield. While the Royal Commission threatened this status, and NAB was forced to cut its dividend, changes to franking credit policy would have damaged the banks’ reputation as a reliable investment even further.
While a change in franking credit policy wouldn’t actually affect the underlying value or operations of the business, it would reduce the return of some investors through taxation.
This inherently means that investors would be willing to pay less for the business if their return is likely to be reduced.
With franking credits set to stay, investors are likely willing to pay more for the banks now than they were last week when the policy was uncertain.
Dividends Are Very Important to Banks
Dividends really do matter for the banks because many analysts value the banks using a dividend model.
Again, a change to franking credit policy wouldn’t affect the underlying value of the business, but if the bank chose to change its dividend payout ratio as a result, it could change the value of the business as calculated by a dividend model.
With some of the uncertainty around dividends removed from the market, you can expect the banks to receive an ongoing boost to valuations.
If you’re more concerned about growth than dividends, check out the investment ideas in the free report below.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
