Has the Australian Banking Sector Bottomed Out?

If you missed market movements yesterday, I’ll briefly summarise what happened.

Banks declined. Australia’s Big Four banks each lost around 2.5–3.5% of their value yesterday. The worst-off was ANZ Banking Group [ASX:ANZ].

Aussie Big Four Banks stock chart 30Mar16

Source: Google Finance

The big question is: why did Aussie banks tank yet again?

Market sentiment is a driving force for a lot of markets. Whether it affects property or stocks, market sentiment creates short term volatility.

What’s the problem with volatility? Nothing at all. Volatility is great for markets, as they allow investors to get in and out of desirable positions. And while volatility benefits investors in many other ways, the problem arises when it comes to selling at the bottom or buying at the top.

Why do people make these mistakes? I would argue it’s because of market sentiment. But what is market sentiment, anyway?

You’ll often hear about sentiment or confidence indicators around various markets. And it means exactly what it implies.

What do investors think or feel about the current situation right now? A lot of the recent sentiment surrounding banks and other sectors has been negative in general.

Troubles surrounding China, commodity woes and interest rates are affecting Australian banks more than necessary. This is not to say that banks are being treated unfairly, or that they are being sold for no reason.

However, what might cause investors to jump in an out of bank stocks could have nothing to do with their future value. Just to be clear; when I refer to those who jump in and out as investors, what they actually are is speculators. They’re speculating that banks may go up or down in a very short period of time.

If we assume that this happens, then the small daily price changes shouldn’t affect an investor who has a much longer time horizon. If we look at Australia’s Big Four banks over the past month, it’s interesting to see that share prices only went up…to be sold down again.

Big 4 Banks month 30Mar16

Source: Google Finance

National Australia Bank [ASX:NAB] was the clear outperformer for the month. NAB added as much as 17.03% to their share price at the start of March. However, after 18 March, all four banks started to recede. Other than ANZ, the price drop had very little to do with their financials.

The latest story surrounding ANZ was their $100 million-plus increase in bad debt. This bad debt has been associated with the resource sector and all the woes that they’ve had to endure as a result of it. But what the market has implied is that it could be an industry wide problem.

Which means investor might be more likely to believe that bad debts are inherent within Commonwealth Bank of Australia [ASX:CBA] and Westpac [ASX:WBC] as well.

However, I don’t believe Australian banks have it that bad. Loans given to the resource sector are nothing compared to exposure Australian banks have to commercial property.

Towards the end of last year, Australian banks increased their commercial property exposure by more than $4.7 billion. And, during the 2015 September quarter, their total exposure to commercial property was around $240 billion.

So are the bad debts surrounding resources just scaring investors to get out while they still can? Or is it just something that will be forgotten at a moment’s notice? The reason why I would lean towards the latter is for the exact reason I stated above.

Australian banks have much bigger investments compared to what they loan resource companies. Of course, ANZ amounting close to $900 million of bad debt is not an ideal item on the balance sheet. But investors need to decide whether they are investing for a long period of time (5–10 years). Or if they’re just in it for the quick buck.

And I just want to be clear, I’m not trashing trading. But if you’re looking to hold a stock for 5–10 years, why would you buy or sell based on market sentiment? The only factor that should sway your investing is the fundamentals of the company and the wider macro sphere.

Härje Ronngard,
Junior Analyst, Money Morning

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