All Big-4 banks provide investors with yields well above historic averages. Yields have been rising strongly as concerns over the global financial system and the realisation of a benign domestic outlook has led to bank underperformance relative to industrial peers.
Historically high yields
All four banks provide yields well above their historic 10 year averages, see charts to left. ANZ is trading at a yield of 7.9% compared to its 10 year average of 5.7%, CBA is 7.8% vs 5.8%, NAB 8.8% vs 6.0% and WBC 8.5% vs 5.8%.
Shaw Research believe current yields provide investors with unusually attractive risk/reward as we see little threat to the quantum of dividend payments over the medium term. We believe the market has already factored-in benign revenue and cost outlook and this is reflected in earnings and thus dividend expectations.
Further, the Australian majors remain among the most conservatively capitalised banks in the world, a situation that has strengthened since the GFC. Bank balance sheets have more Tier capital than required under APRA’s interpretation of the new Basel III capital regulations. Indeed, all four banks already materially exceed current requirements and in fact meet increased requirements to be introduced in 2016. This excess capital provides a buffer which could maintain dividend payments in the event of an unforseen occurrence (say a Eurozone default or bank collapse). Indeed, as we flagged in a note dated 8 September, we believe there is the possibility of capital returns if the global banking environment stabilises and confidence returns to the Australian consumer and Boards.
Another reason Shaw believe the Australian banks are relatively immune from offshore concerns is that they are basically self-funding their lending requirements from domestic deposits. Cash deposits have increased materially as consumers have become ncreasingly risk averse; savings rates are at 30 year highs. This implies that the Big-4 are much less exposed to offshore wholesale funding requirements in the medium term than they were during the GFC.
All four major banks provide particularly attractive yields at favourable risk/reward. We maintain our preference for NAB and ANZ over CBA and WBC.
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Shaw Research 26 September