"If you look at WBC,NAB,ANZ they all are around the price they were 20 years ago ,they pay good dividends but there has been no growth in the SP,..."You've hit a very important nail on the head: there is a generation of investors who view the banks as good investments, but which I think are hanging onto a reputation for wealth creation by the big banks, which once existed for good reason, but those reasons are no longer in existence.
For many years - for almost 2 decades between 1995 and around 2014 - the major banks were certainly investment-worthy, but they are no longer today, in my view.
Probably not even CBA, the bank that stands head-and-shoulders above the other in terms of quality and banking pedigree (although if I was ever going to feel compelled to owning shares in a bank, I would look no further than CBA...the rest of them are really not very good businesses these days and are not particularly well-managed).
(Forget about MQG in the comparison exercise; MQG operates an entirely business model compared to the 4 major banks, so to compare MQG with the Big 4 is to compare apple with oranges).
Here's why I think the banks are somewhat flawed investments these days:
The Australian banking sector offers a fascinating case study in industry evolution, with the history of the banking sector able to be divided into two parts:
1.) The Golden Decades of Shareholder Value Creation (1990s to 2014/15)
2.) The Epoch of Mediocrity (post-2015)
This dual history of starkly different financial performance between those two time periods can be clearly seen in the EPS history chart for ANZ (EPS charts for NAB and WBC omitted in the interest of brevity):
View attachment 4900273During the two "Golden Decades" (represented clearly by the blue columns in the chart), which commenced in mid-1990s, banks enjoyed significant earnings tailwinds from strong growth in lending (coinciding with the start of the residential real estate boom) and a benign competitive landscape.
But the real multi-year kicker to bank earnings was the
one-off, major structural change in the banking landscape in the form of the advent of online banking.
The move to digital banking allowed the banks to slash their cost- and capital-intensive branch networks and thereby remove extraordinary amounts of fixed costs (salaries, rents, maintenance, branch refurbishments, etc).
Digitisation allowed the industry's Cost-to-Income to be driven down by well over 1,000 basis points over that period, boosting bottom-line earnings for the industry by billions of dollars.
Between 1998 (which is as far back as my spreadsheet records), ANZ, NAB and WBC increased their EPS by between 3.4 times (ANZ) and 4.0 times (WBC).
CBA's rose almost 5-fold over that period(!).
As can be seen in the chart above, the only EPS hiccup over that period occurred during the GFC, when ANZ's EPS was re-based lower, but the underlying growth trend remained intact thereafter.
But by the early 2010s, what I call the "Great Banking Sector Digital Dividend" had run most of its course, and the double-digit annual EPS growth started to slow to low, single-digits. By 2015, the digital transformation lemon had been squeezed dry.
That's when the banking sector investment proposition changed in quite a remarkable way (although I didn't recognise it at the time; only a year or two later), from shareholder value creating powerhouses to unattractive long-term investments.
As can be seen, since the 2015 peak, ANZ's earnings have been under pressure (the grey columns): EPS and DPS have fallen by 12% and 19%, respectively. ANZ's ROE has been crunched from 15.4% in 2014 to just 10.4% today.
That's some serious under-performance from a business that has enjoyed the benefit of unprecedented credit expansion and which effectively participates within a cosy duopoly industry structure, which has high barriers to entry.
The market, being the ultimate arbiter of these sorts of things, bears this out: ANZ's share price was over $30 in mid-2015; today it is under $25.
Note that CBA has performed better, but even it's EPS is largely unchanged from the 2015 peak
View attachment 4900438Interestingly, unlike the share prices of the other banks which have fallen since 2015, CBA's share price is today almost 30% higher.
Given the bank's EPS is at a similar level, it means that the valuation multiple of the stock has been re-rated by the market by 30% (to a lofty 17x P/E multiple today, which is high compared to the stock's history.)
Over every investment time frame, CBA has outperformed its Big Four peers (as well as the overall market, expect over 10-years):
View attachment 4900690But besides CBA, the banking sector has clearly been a value trap over an extended period of time and I think it remains a value trap today.
There is a generation of active investors today (not just individual investors, but even institutional fund managers) who are captive to the anchoring bias that harks back to the days when the banks were earnings growth powerhouses.
However, as has been shown, the famed earnings growth power of the Australian banking sector hasn't existed for a number of years, and it is unclear what will make it return.
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(20min delay)