PM Capital says there is not much room left for value growth in the big Australian banks.
Chief investment officer, Paul Moore, were trading on hard-to-justify valuations and operational metrics when compared to their historical valuations and compared to other banks around the world.
Profits for New Zealand’s big four banks, which are owned by Australian parents, soared to near $3.5 billion for the 2011/2012 year. Cost cutting had driven increased profit margins.
Moore said while they were solid businesses, he did not believe Australian banks were the best place for new investment.
The current valuations did not take into account the significant risk of the Australian mortgage market, he said.
“Because of the way risk rating works in the global capital system, home loans are seen as risk‐free, so can be held in great quantities on the balance sheet. In terms of gross loans to equity, Australian banks are sitting at up to 8.4 times. The perception of home loans is that they are not problematic, but the reality is if we ever had an environment where home prices were to decline 20% to 30% on a permanent basis, there would be a significant issue. The sizable amount of leverage on the balance sheet from these loans would cause serious distress.”
He said the bank with the highest leverage had the highest P/E ratio.
“This highlights that people are forgetting how balance sheets work and assuming home loans will be fine forever, which is exactly what happened in 2008 in the US, and look how that turned out.”
PM Capital’s banking analyst Uday Cheruvu said US banks were a better bet, as consumer borrowing growth turned positive, house prices were as low as they had been since 1987 and debt servicing levels were strong. But bank stocks were still lagging.
Commonwealth Bank, the parent of ASB, has three times as much debt on its balance sheet than US bank Wells Fargo and its shares are trading at an almost 50% premium. It has four times the home loan leverage.
New Zealand and Australian investors also had the benefit of a strong currency when buying overseas stocks.
Moore said investors who wanted to maximise capital over the long-term needed to go out on a limb and buy assets that other investors were avoiding.
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