The boutique Australian investment manager said it has reduced its weighting for the major Australian banks to underweight with many of the tailwinds supporting bank earnings growth in recent years “now coming to a head or turning into headwinds”.
Speaking at a conference in Sydney yesterday, Alphinity principal Andrew Martin said one of the main drivers of earnings growth for the banks in the past five years, a lack of competition, is now beginning to turn around.
“Coming out of the GFC the banks really had no competition for some time, so they took their substantial market share and they re-priced their products,” said Mr Martin.
However, as liquidity has entered the market, Mr Martin said bank margins have come under increasing pressure.
While the pressure initially began with institutional lending it is now coming right though to mortgages, said Mr Martin.
“You’ve got the likes of Macquarie Bank and other smaller guys really pushing hard because they are now able to profitably fund the growth they want to get,” he said.
Mr Martin said the Financial System Inquiry is “another potential negative hanging over the heads of the major banks”.
“They are talking about competition and levelling the playing field and looking at moral hazard and whether there is a cost to be paid for that – it’s hard to see how it could be positive,” he said.
He believes the Financial System Inquiry will likely be “at best neutral for the big banks”, but thinks it will more likely be negative.
“The question will be what actually gets enacted at the end of the day,” he said.
Mr Martin said Alphinity also suspects the tailwind provided by international institutions in recent year will also begin to taper off.
He said, up until recently international institutions had very few options offshore, so Australian financials with high yields, the benefit of the strong dollar and Australia as a triple A country had been an attractive prospect.
However, Mr Martin said the rating of our banks from an evaluation perspective relative to the rest of the world is now “out of whack”.
“Other financial systems are now stabilising, so international institutions now have far more options,” he said.
“The one-way Australian dollar also doesn’t apply anymore”.
Mr Martin said while the tapering off of these tailwinds doesn’t necessarily mean the banks are unstable, it has diminished the attractiveness of the major banks relative to other sectors in the economy.
