The Australian equity market has rallied strongly since 1 July 2016, but the big four banks have not participated and, in some cases, have even lost ground.
According to Franklin Templeton’s lead analyst for Australian equities, Alastair Hunter, major bank share prices are being weighed down by three main investor concerns.
First, yield-hungry investors are worried about the sustainability of the banks’ dividends, Mr Hunter said.
Such fears are justified, he added, while Franklin Templeton believes the dividend payouts of 75 to 80 per cent in recent years “are likely above what is sustainable long term”.
ANZ became the first major bank to cut its dividend in May 2016, decreasing its payout by 7 per cent.
“There is some risk that another of the four will decrease its dividend, but we believe the reduction will be modest,” Mr Hunter said.
Major bank earnings are the second factor weighing on investors’ minds, he said.
“Revenue growth is moderating, consistent with the slowdown in the Australian and New Zealand economies and due to competitive pressures in consumer and institutional markets,” Mr Hunter said.
“The collapse of a small number of high-profile corporations, particularly commodity-related companies, led to increased levels of impaired bank loans at the start of this calendar year, and those loans are now beginning to have some effect on bank earnings.
“We think earnings deterioration may continue near term, but we also believe the current credit cycle will be an average rather than a severe one, although the market appears to have priced in a severe cycle at the moment.”
Finally, capital levels continue to hang over the big banks.
“Global bank regulators have said they will likely announce new capital requirements by the end of 2016,” Mr Hunter said.
“This comes on the heels of the local regulatory agency requiring an increase in capital that was announced in July 2015 and took effect in July of this year. The major Australian banks raised AU$22 billion of new equity in calendar 2015.
“The expectation, however, is that the second increase would not be implemented until 2018 or 2019, meaning this time, banks would have more time to prepare for it.
“And, despite some hand-wringing by observers, we believe banks will be able to use dividend reinvestment programs and retained earnings to shore up their capital levels, without resorting to large capital raisings, as many have done in the last 12 months,” said Mr Hunter.
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