Investors start to bale out of banksBy Sharon KempJune 10...

Investors start to bale out of banks
By Sharon Kemp
June 10 2002





Retail investors were net sellers of Australian banks last week - the first sign of fear that, at a price to earnings multiple of 15 times, the sector's run may be over.

If their decision proves wrong and banks continue to climb, last week's sellers will still be luckier than those who took the advice of most analysts in January and sold down their holdings in the four major banks.

Those earlier sellers missed out on at least one third of the sector's rise of 8 per cent plus since early January.

If banking stocks have peaked, the analysts who jumped back on the bank bandwagon after the big four reported more than $5 billion in interim earnings now risk suffering whiplash as share prices fall.

The analysts in question, including Merrill Lynch, UBS Warburg, JP Morgan, Credit Suisse First Boston and JB Were, to varying degrees, made the call in January because they expected many cyclical stocks would impress investors with higher earnings growth and take the shine off the banks which had been reporting double-digit growth for several years.



advertisement

advertisement

At the time, the banks were trading at an average price of 13.5 times earnings and, as it turned out, the profit surprises from non-bank industrials and resources stocks were for the most part negative.

Profit downgrades from the likes of Coles Myer, Mayne Nickless, Computershare and worse-than-expected earnings from WMC and BHP Billiton sent investors rushing back into defensive stocks such as banks, and back into companies with proven management ... such as banks.

The trend has culminated in two of the big four, NAB and ANZ, reaching record high share prices on two days late last week.

The Commonwealth is within coo-ee of its high of $34.15 reached last June and Westpac's share price is meandering just below its high of $16.87 recorded in February.

The Sydney bank has just completed two transactions, acquiring Rothschild's Australian funds management arm and selling its AGC finance division, and as such is subject to integration risk and proving it can still post double-digit earnings a share growth without AGC's contribution.

ANZ hit a record high of $20.02 on Thursday, but slipped back 13c to $19.89 the next day.

NAB also broke a record on Thursday before going ex-dividend. The stock was 23c lower at $34.05 on the last day of the week. On Friday it was CBA's turn to test its high, which it did by climbing 1.25 per cent to $34.05.

A forecast decline in home lending was also part of the picture in January but hope has since grown that business lending will make up for falling fees and interest income from mortgages, and at a higher margin.

Banks have also proved compelling because of their efficiencies and evidence suggests that cost-to-income ratios can improve further.

As for one of the few brokers which picked the market correctly, even to the point of moving to an "overweight" rating on banks in January, Salomon Smith Barney has scaled this back to moderate overweight. The broker now argues that "in the absence of severe recessions and a collapse in asset price markets, banks have combined both defensive and growth characteristics".

"While strong US economic numbers may hasten the shift of global investors out of Australian banks, our advice is not to jump too soon," it said.

The West Australian