Simple is always the best. No need to over complicate things.
But it doesn't hurt to understand the lay of the land. Some have CBA/banks well inside their circle of competence and love to nerd out on it... I like to think I do anyway. So here it goes...
US and EU fund managers have been shorting CBA (and other Australian Banks). Not to say Australian fund managers haven't been shorting also. Regal Partners chief picker Phil King have been at it too. It is the usual seductive story that they are overvalued compared to their international peers. International investors have historically made mistakes by thinking Australian banks operate in the same regulatory environments as their domestic banks. The basis for their thesis is that four banks from a small backwater in the financial world have little business, being amongst the largest in the world.
There is also the argument that banks and Commonwealth Bank had been caught up in the wave of passive investment from index funds flooding into global investment markets.As one of the largest stocks in the Aussie index, CBA is one of the biggest beneficiaries of that. There is some truth in this but the argument can also be said about BHP but looking at its SP that is really not the case. Don't get me wrong I wish that was true maybe the large miners in the portfolio would be in better shape technically right now. Much of the hysteria about ETFs and passive funds distorting markets, mindlessly driving up prices or creating bubbles is exactly that, hysteria. Anyone interested can read Eric Balchunas book, The Bogle Effect
On the surface they can be forgiven to be right but look under the hood... Most of the biggest banks in the world are from the US, with the US banks deriving less than half of their profits from mortgages, with most coming from other arms of the banks. The remainder of the list is made up with from Canada (RBC), India (HDFC) and Australia’s CBA.
Interestingly none of the Australian banks are considered by the Financial Stability Board (FSB) to be globally significant banks, despite CBA (market capitalisation A$216 billion) being significantly larger and more profitable than the globally significant Deutsche Bank (market capitalisation A$44 billion). Consequently many are calling the Australian banks, especially CBA overvalued and that investors should short sell the major banks.
But boy are they wrong as we are finding out now. The big four Australian banks control around 75% of the domestic lending market and enjoy higher barriers to entry due to the high level of regulation placed on them. Conversely in the USA there are over 4,000 registered commercial banks, with the top 5 (Wells Fargo, Bank of America, U.S Bank, JP Morgan Chase and PNC Bank) having a market share of only 7%.
While the number of banks in the USA sounds like a preferable market structure to the Australian banking oligopoly, this is only due to previous regulations that precluded banks from opening branches outside their home state. This results in a large number of small and often financially precarious banks with limited geographic diversification and can lead to frequent bank collapses such as Silicon Valley Bank in 2023. Conversely the last bank collapse in Australia was the State Bank of South Australia in 1991.
Additionally, the Australian banks are regulatory made to be better capitalized leading to lower loan losses through the cycle and are more consistent profitability than their US or European peers due to low impairment and provision charges.
Due to strong capital ratios built up post-banking Royal Commission through COVID-19, the big four Australian banks are now well capitalized and have begun large share buyback schemes. ANZ has announced a $2 billion buyback, a $1 billion CBA buyback, a $2 billion NAB buyback and a $2 billion Westpac buyback. For investors, this will support the share price over the short term with a buyer always being in the market every day to hold up the day-to-day share price. Not only will it support the share price, but it will also reduce the amount of outstanding shares to divide next year’s profit by.
To top that off...The banks all normally commit to neutralizing their dividend reinvestment plans, which will see banks buy shares on the market and give them to shareholders instead of issuing new shares to shareholders. This may sound insignificant, but across the May 2024 dividend schedule, Atlas estimated $900 million worth of shares were bought to support the neutralization.
As a final comment. CBA is still the leader for the banks in marketing, technology, customer service, and quality of management and has the highest return on equity. This kind of leadership absolutely deserves this high of a premium.
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