Goldman Sachs Asset Management’s Dion Hershan invested in Australian banks as concerns about capital levels and a weak economy battered their shares, betting efforts to improve efficiency will bolster earnings.
The U.S. firm, which oversees about A$6.5 billion ($5 billion) in Australian equities, added holdings while Commonwealth Bank of Australia and its competitors sank and price swings became the widest in almost two years.
Bank valuations in Australia are now close to the cheapest since 2012 relative to global peers, catching the attention of money managers from Warren Buffett to Fidelity Worldwide Investment. Hershan, head of Australian equities at Goldman Sachs Asset Management, said he took advantage of market “noise” to increase his holdings and expects productivity improvements to continue.
“Most of the attention on the banking sector at the moment is on capital and credit risk,” Hershan said in an interview. “People are losing sight of the fact that credit growth is improving, funding costs are coming down but equally banks have also been great at improving their productivity.”
The average cost-to-income ratio for the four largest Australian lenders dropped to 44.2 percent in the latest six-month period, data compiled by Bloomberg show. That compares with 63 percent for the largest U.S. and Canadian banks, 61 percent for their British peers and 43 percent for the biggest Singapore lenders, the data show.
Commonwealth Bank, Australia & New Zealand Banking Group Ltd. and Westpac Banking Corp. are the top three holdings of Goldman Sachs Australian Equities Fund, which managed A$555 million as of May 31, according to its website. The lenders made up almost a third of the portfolio, more than their 23 percent weighting in the benchmark S&P/ASX 200 Index.
Investors have favored Australian lenders for their shareholder returns amid five consecutive years of record profits. Forward dividend yields on Commonwealth Bank, National Australia Bank Ltd., Westpac and ANZ are among the highest in an index of global bank shares, with all forecast to pay out at least 5 percent.
Westpac led the lenders higher on Monday with a 1 percent increase at the close of trading in Sydney. National Australia climbed 0.3 percent, ANZ rose 0.4 percent and Commonwealth Bank gained 0.7 percent. The S&P/ASX 200 index advanced 0.2 percent.
Buffett told Fairfax Media last week that he may buy an equity stake in at least one of the country’s banks in the next five years.
Three of the biggest lenders pledged to bolster their capital after the banking regulator said in April that recommendations in a government report for higher buffers against home-loan risks can be “dealt with sooner rather than later.” Shares of the four banks have fallen as much as 16 percent so far this quarter.
“When people are fixated on what’s happening next week or next month, they often lose sight of what’s going to happen over the long term,” Hershan said. “We’ve modestly increased our positions” in Australian banks shares.