The Big Four Aussie banks such as Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Group (ASX: WBC) have felt the heat over the past 24 months.
The Royal Commission highlighted a banking industry plagued by unethical lending practices amidst a sea of conflicted remuneration. The findings added pressure to the banks who were already facing headwinds due to tighter lending standards, especially in relation to the provision of interest-only loans and more recently the Labor party’s controversial proposal to abolish cash refunds for excess franking credits.
Looking at the past 12 months Commonwealth Bank is the only one of the big four that has eked out a positive return, with National Australia Bank Ltd. (ASX: NAB), ANZ Banking Group (ASX: ANZ) and Westpac Banking Corp all seeing their share prices retreat 10% or more. But with the Coalition’s shock win on the weekend is this the catalyst for a turnaround in the fortunes of the big four Aussie banks?
Election Boost
In the short term, there is certainly a case to be made for the banks on the back of the election result. Monday’s trading saw a strong rally as dividend-hungry retirees breathed a collective sigh of relief. At current prices, the banks are yielding dividends between 4-6%, which becomes even more impressive when grossed up for franking credits. For investors seeking income it makes for a compelling case but I would proceed with caution.
Over days or weeks, the share market is a popularity contest with share price movements dictated by the fickle nature of consumer sentiment and temporary issues. In the long run, however, share prices are driven by profit. When faced with the challenge of maintaining a strong performing portfolio over the long term you will be well advised to concentrate on the long term earnings potential of the businesses you invest in.
Facing headwinds
The banks are all facing significant headwinds in the medium to long term. The banks have thrived on the back of an unprecedented credit boom that has lasted the best part of two decades but with Australian households stretched to their limits, the scope for further credit growth is largely restrained.
The other issue I have with the banks is the general idea that one should be heavily invested in them solely on the basis of the franked dividends they provide. Whilst I can understand the allure of the income, buying shares purely for the dividend is a very dangerous game, just ask owners of Telstra Corporation Ltd (ASX: TLS) shares in recent years. A strong dividend needs to be backed by strong profits or it can only ever be temporary.
It’s also worth noting that total return is more important than the dividend itself. You’d be much better off owning a share that appreciates 10% in price and pays no dividend than owning a share that depreciates 10% in price but pays a 10% dividend
Buy, Hold or Sell
Whilst the banks have a place in a well-rounded portfolio of Aussie shares I think they face important and meaningful challenges in the medium term. Therefore, I will be remaining underweight and instead favour shares of businesses operating in growing industries with bright prospects for future growth.
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