After losing A$57 billion ($44 billion) in market value, Australian bank stocks are starting to look more like, well, bank stocks.
Valuations on a gauge of the nation’s lenders are near the cheapest relative to the global average since January 2013. Just two months ago, they traded at the biggest premium since Bloomberg began compiling the data in 2005. The shares that led Australia’s six-year rally have slumped amid concern about heftier capital requirements, driving multiples on Commonwealth Bank of Australia and its three main peers in May to the lowest this year.
For Ausbil Investment Management Ltd. and Platypus Asset Management, that’s a buying opportunity. Demand for the world’s biggest bank dividends from money managers and retirees from Australia’s A$1.9 trillion pension savings pool had pushed valuations more than 25 percent above their five-year average as recently as March.
“Australia’s largest banks have been oversold,” Paul Xiradis, Chief Executive Officer of Ausbil Investment, which oversees about A$10.2 billion and holds stakes in the lenders, said by phone from Sydney. “They offer incredibly good value on an absolute and relative basis. Capital concerns have been overplayed.”
Banks make up 30 percent of Australia’s S&P/ASX 200 Index. Commonwealth Bank shares tumbled 12 percent from a record high on March 20 through Tuesday, erasing A$18 billion in market value, after the lender told investors earnings growth stagnated amid higher expenses and bad-debt charges.
Westpac Banking Corp. lost 16 percent from its March 25 peak through Tuesday as it reported first-half profit that missed estimates and said it would raise capital. National Australia Bank Ltd. and Australia & New Zealand Banking Group Ltd. both slid more than 10 percent in the past two months as they committed to raising more capital.
“When a crowd rushes for the exit, things can get ugly,” said Michael McCarthy, chief market strategist at CMC Markets in Sydney. “The recent quarterly reporting from the banks shows earnings growth is slowing, introducing doubts about the sustainability of current dividend yields. Secondly, the global selloff in bonds is reducing the attractiveness of the yield play.”
Earnings per share for Australian lenders will increase by 4.3 percent over the next year, with growth slowing to 0.7 percent in the following 12 months, according to data compiled by Bloomberg.
Don Williams at Platypus, whose fund has topped 92 percent of peers this year, sees an end to share-price declines. He’s buying National Australia Bank shares after the lender raised A$2.7 from institutional investors and exited its U.K. business. He also owns Westpac and Commonwealth shares. NAB intends to raise another A$2.8 billion from retail shareholders.
“We’re expecting NAB to be the best performer over the next three years,” Williams, Sydney-based chief investment officer at Platypus Asset Management, which oversees about A$1.6 billion, said by phone. “They’ve finally dealt with their legacy issues in the U.K.”
The S&P/ASX 200 Index has the highest forecast dividend yield among the world’s largest markets, data compiled by Bloomberg show. The 4.7 percent rate doesn’t include a tax advantage known as franking credits that boosts returns for domestic investors. The four largest lenders are all estimated to make payouts that top that level.
ANZ shares lost 0.5 percent and CBA declined 0.6 percent on Wednesday in Sydney. National Australia Bank and Westpac both slid 1.3 percent, while the S&P/ASX 200 fell 0.8 percent.
“There’s a bit of a floor in terms of how much more they can weaken because you’ve still got pretty attractive dividend yields,” Mark Lister, head of private wealth research at Craigs Investment Partners Ltd., which manages about $7.2 billion, said from Wellington. “It’s probably just a natural pullback and response to them having performed very well.”