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Which bank?

The $64,000 question now is what to do with your exposure to the bank sector?

Do you buy more because the sector is rock solid in terms of its balance sheet and dividend payouts are even higher, or do you flick a few out to take some profit on a sector that has outperformed just about everything in the market?

The interim reporting season from NAB, WBC and ANZ has been cast off virtually the same template with low credit growth, lower impairment charges, earnings growth driven by more cost cutting and higher dividends.

It’s a fair bet that CBA’s interim in August won’t look much different in flavour.

Within the sector itself, we think NAB is the lowest quality stock among the majors given its on-going process of working down its exposure to a very challenged UK economy. NAB has also been chasing a greater share of the prized Australian housing market where it has just 15.2%.

The aggregate market value of the four majors at $378bn is approximately 14x the aggregate consensus cash earnings of $26.9bn for FY13. Adding in an average net dividend yield of 5.0% pops out a “PE + Yield’ total of 20 which suggests the sector is not as overheated as some think.

Looking at the four majors individually, there are few differentiating characteristics, but in short:

  • CBA is the highest quality franchise and has the largest exposure to wealth management, an area of strong long-term growth.
  • ANZ has a strategy of generating a larger proportion of its earnings from Asia.
  • WBC has a multi-brand approach to financial services.
  • NAB has issues to sort out in the UK.

We would broadly view the banks in that order of preference, recognising that there are many other aspects of analysis that contribute to that view.

Should investors switch some bank exposure to other sectors and if so, which sector/s?

That decision relies on the total bank exposure held by an investor. Within the S&P/ASX200 Index, the financial sector represents 42% of the index but unless you are benchmarking your performance against that index, then this won’t mean a great deal.

A more relevant consideration might be based on the certainty of the income that your bank exposure provides and in this regard, it is difficult to argue anything other than a very high level of certainty.

Finding an alternative investment that is paying a higher level of income is not easy, other than perhaps Telstra, so unless investors are looking for higher earnings growth as opposed to income, then remaining invested in banks is a viable strategy.

We would add that switching back to cash by taking profits on bank shares will reduce income given the lower rate of return on cash or term deposits.


Choosing your bank exposure is an important but complex strategy decision. If you would like to discuss your position, please call either Kim Slater or Greg Fraser on (02) 9900 9200.

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