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Australian Bank Shares Are Soaring So Fast, You Could Get a Nosebleed

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  • T. Rowe Price and Contango money managers see limit to gains
  • Aussie bank valuations have surged in past two months

One of the fastest rallies for Australian banks in six years is prompting fund managers to stop and catch their breath.

Randal Jenneke of T. Rowe Price is pausing after moving overweight in the banking sector before the U.S. elections. “We are keen to increase our financials exposure further,” said the Sydney-based head of Australian equities at the firm, which oversees about $813 billion globally. “However, having seen some big moves in the sector recently, we prefer to wait and build our exposure in a more price-sensitive way.”

Australian financial shares have jumped as much as 20 percent since Nov. 9, when Donald Trump’s surprise victory triggered a surge in global bank stocks amid a wave of optimism that global growth will improve. An index of the four biggest banks in Australia -- Westpac Banking Corp., Commonwealth Bank of Australia, National Australia Bank Ltd. and Australia & New Zealand Banking Group Ltd. -- reached the highest level since August 2015 on Monday.

At stake now, as the chart below shows, is what the expansion in bank valuations means for investor returns. The largest surge in the commonly used price-earnings metric, based on estimated profit, was at Australia & New Zealand Banking Group, where the forward PE went from below 9 less than one year ago to 13.5 on Jan. 9, a more than 50 percent increase in valuation.

Australian bank stocks retreated for the first time in six days on Tuesday, closing down 0.9 percent in Sydney. The benchmark S&P/ASX 200 Index lost 0.8 percent. ANZ posted the largest decline, falling 1.5 percent, the most since Nov. 9.

Overall, investors haven’t turned heavily pessimistic at this point. Short interest, a gauge of investor bearishness, has declined over the past six months. Australia’s Big Four banks have an average level of short interest that is less than half that of the country’s largest firms.

For George Boubouras, who has reaped the rewards from a heavy tilt toward bank shares at Contango Asset Management in Melbourne, the bulk of the gains have been made but financial stocks aren’t about to slump. The chief investment officer, who oversees about A$650 million ($478 million) of equity investments, says most of the rally has past and banks now are at “fullish value.”