Should You Buy Australian Bank Stocks Now?

Australia bank stocks have declined sharply in recent months and are now trading at very attractive levels. For example, Westpac(WBK) has plunged from over $30 a share to about $21. With a P/E of just 12 it has a juicy dividend yield of 6.75%. Other major banks have similar figures. So should investors buy Aussie bank stocks now?

The answer to my question is it depends. For most investors it is best to wait till February of next for clarity before buying into this sector. For those willing to deploy spare cash and have the ability to add more if stock prices fall further and hold for five years of more, then it is time to add some at these levels.

The reason for the sharp decline in the stock prices is not only the rout in commodity prices but also the ongoing investigation into the banks’ lending prices by the The Royal Commission. The Commission is expected to complete its investigation by Feb of next year and release a report. This may lead to legislative changes which is a big uncertainty. As there are multiple uncertainties facing the industry investors have sold off Aussie banks.

From an article in the BBC:

A landmark inquiry into wrongdoing among Australia’s banks and financial services has begun.

The royal commission – the country’s top form of public inquiry – will investigate alleged and established misconduct in the sector.

Australia’s banks, which are among the most profitable in the world, have been accused of customer exploitation and corporate fraud among other scandals.

The inquiry held its first hearing in Melbourne on Monday.

Commissioner Kenneth Hayne said the inquiry would examine misleading and deceptive behaviour in the industry and conduct which fell “below community standards and expectations”.

He said while Australia had “one of the strongest and most stable” financial service sectors in the world, there had been many established examples of misconduct, raising questions about cultural and governance practices.

Source: Australia royal commission inquiry into banking begins, February 2018, BBC

From a Guardian piece on the topic:

Which banks are involved ?
The so-called big four banks – Commonwealth Bank, Westpac, ANZ, National Australia Bank – are being looked at. They comprise four of the five largest companies in Australia by market value, holding an inordinate amount of power over the financial system.

Other companies including AMP, BT Financial, Aussie Home Loans and St George, and a number of small car finance companies will also be called, and more financial institutions will be asked to appear as the year rolls on.

Australia’s seven largest authorised deposit-taking institutions (including the big four) hold roughly $4.6 trillion in assets – around two and a half times the size of Australia’s $1.8 trillion economy, as measured by nominal GDP.

Source:Banking royal commission: all you need to know – so far, The Guardian, April 2018

The Australian Competition and Consumer Commission (ACCC) is also planning to bring criminal carter charges against ANZ bank. More details can be found here.

The four major Aussie banks trading on the US markets are listed below with their current dividend yields:

1.Company: Westpac Banking Corp (WBK)
Current Dividend Yield: 6.75%

2.Company: National Australia Bank Ltd (NABZY)
Current Dividend Yield: 7.42%

3.Company: Australia and New Zealand Banking Group Ltd (ANZBY)
Current Dividend Yield: 8.94%

4.Company:Commonwealth Bank of Australia (CMWAY)
Current Dividend Yield: 6.44%

Note: Dividend yields noted above are as of June 1, 2018. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Investment Perspective:

Aussie banks may take off if the commission’s report to be released in February 2019 is not too damaging. These banks have the ability to withstand severe crises as evidenced by their performance during the global finance and can easily manage the penalties that may be imposed by the state. On the other hand, very serious restrictions on their ability to lend and earn profits may force the banks to cut dividends as their earnings would be adversely affected. But past performance shows that the probability of them cutting dividends is lesser in this scenario. So either way income investors and those willing to bet on a sharp turnaround may want to take bite now. Others can wait and watch as the stocks are unlikely to move drastically either way until the investigation is complete.

It should be noted that for US investors, Australia does not charge dividend withholding taxes.

Disclosure: Long WBK and NABZY


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