Speaking in Sydney yesterday, Mr Laurence – who manages the Perpetual Global Share fund – said he currently has no Australian banks in his portfolio due to the “valuation distortion”.
Global banks like Bank of America are trading slightly above NTA (net tangible assets), he said – whereas the Commonwealth Bank is trading at two to three times NTA.
When it comes to PE (price/earnings), Lloyds is trading on a ratio of 9.0 whereas the cheapest Australian banks – ANZ and NAB – have PEs of around 12.5, Mr Laurence said.
“The only benefit that Australian banks have is that the housing market hasn’t busted yet – it just keeps growing,” he said.
That is the reason Australia didn’t see any ‘blow-ups’ during the GFC, when bad and doubtful debts were at their highest in recent times, Mr Laurence said.
“It’s very unusual to have the current credit cycle, and at some stage the RBA won’t be able to cut anymore and they will have to start raising interest rates.
“You’ve got to think that we’ll start to see non-performing loans start to increase and bad debts rise, and we won’t see the earnings growth that we’ve seen,” Mr Laurence said.
When a ‘normalised’ bad debt charge is applied to the banks the resulting earnings number is “much lower than [the banks] are currently on”, he said.
The average bad debt charge is “probably 50 basis points”, but the current figures are between 10 and 20, Mr Laurence said.
Head of investment market research Matt Sherwood pointed out that the Australian banks are the most levered players in the market.
“The banks are 25 times levered on their balance sheets so it’s still a very levered business,” Mr Sherwood said.
Normalising payout ratios also drastically affects the valuations of the banks, he said.
“That tells you that banks are not just this permanent winning streak that investors have been on for a long period of time and everything has gone their way,” Mr Sherwood said.
While it is true that house prices have only fallen by five per cent once in the last 50 years, Australian bank stocks are “priced to perfection”, he said.
