Despite the little rebound in financial stocks yesterday, are you happy to buy into the banks yet? We’re not.
ANZ Bank’s yield will still be around 8% even after it cuts the interim dividend. That’s pretty good compared to the 3.75% you can get in a high interest savings account.
But as good as that looks, don’t forget that not only is yield an indication of your potential income stream, but it is a reflection of the potential risk in the investment. Let me put it this way, in the last three months we have recommended two “Main Street Stocks” in the Australian Small Cap Investigator.
The idea being that you don’t always have to look for explosive three-digit percentage returns with small caps. You can also find some well-run, profitable small caps that have been beaten down by the broader market and are virtually recession proof.
The two companies in question are yielding 7% and 9.5%. One of them has even just increased its dividend.
Now, you expect higher risk from small cap stocks, that’s why you invest. You want to see big percentage returns. And if you’re investing in small caps for the yield then you would expect to get a bigger dividend than a blue chip.
So what does it tell you when two small caps with a combined market cap of $200 million, are now offering a yield comparable to a $28 billion bank?
I’ll tell you what it tells you. The yield on these two small caps is probably just about fair value in this market. On the other hand, the bank yields are telling you that there could be worse to come. It’s telling you that a further dividend cut and/or further major write-offs (or impairments as they now like to call it) are on the cards too.
Take a look at the next two charts produced by the ANZ Bank…
Loans past 90 days have nearly doubled. And Impaired loans are up to $3 billion. That’s nearly a six-fold increase since 2006. And guess what, the recession hasn’t even started to bite yet.
Is this likely to be the peak of write-offs and bad debt provisions? We wouldn’t have thought so.
The practice of quote Tier 1 capital standings which the bank now claims to be 8.4% is dangerous. The banks are claiming that Tier 1 capital is the be-all and end-all of capital adequacy. Don’t believe it. It’s a convenient smokescreen to take attention away from the balance sheet.
Bank exposure to consumer credit and commercial credit, especially in the property sector shouldn’t be underestimated. As your editor was explaining to one of our newly arrived marketing guys from the UK, the levels of residential property development in Melbourne during the last ten years has been massive.
You only have to look at South Melbourne, which in 1997 was dominated by low rise buildings – with the exception of the IBM and HWT buildings. Twelve years later and you can’t swing a cat for high rise commercial and residential buildings. It’s the same with Docklands.
Many of those developments were ‘built’ on highly leveraged loans banking on an ever-expanding investment property market. The last few years has seen some of that washed out, but there is still plenty of room for further falls.
Just remember, the subprime mortgage market in the US was only a tiny fraction of the overall loan market. And look at what happened there.
Why the Minimum Wage Could Make Things Worse
We’ll touch on Pacific Brands in Money Weekend tomorrow, where we’ll be asking if the minimum wage policy is helping to exacerbate the number of job losses.
More Bad Signs for Banks
What’s going on with the world? We are sure that the politicians in Canberra and the state capitals are supposed to ‘honourably’ serve the public for a few years before taking advantage of their position by securing a top paying consultancy in the private sector. That’s how it used to work.
Even after the last election it seemed as though the tradition would continue when Peter Costello indicated he may skip off to the private sector. Well, either no-one wanted him or he realized that he may actually have to do some work once he was there.
And now, shock upon shock the world seems to be moving into reverse gear. Former CBA CEO David Murray left the bank in favour of joining the publicly owned Future Fund. And now the ‘young gun’ at NAB, Ahmed Fahour has decided that there’s no future in private sector banking, so he’s off to head-up the new Rudd Bank.
Other Stuff on the Markets
Early on it doesn’t look like the Aussie market is going to finish on a positive note for the month. Month to date the S&P/ASX 200 is down 6.2%.
Since the start of the year the market is down 10.8%…
… And since this time last year it is down 42.5%.