Post-Budget Blues for the Big Four Banks

What’s happened to the banks’ share price since the budget?

Since the budget last month, the Big Four banks are all sharply down.

The Commonwealth Bank of Australia [ASX:CBA] is down 10.5%, National Australia Bank [ASX:NAB] is down 13.9%, Westpac [ASX:WBC] is down 15.8%, and Australia and New Zealand Banking Group [ASX:ANZ] is down a whopping 16.5%. All since the start of May — only one month ago.

A buying opportunity?

Does the drop in banking share prices make them a good buying opportunity now?

Maybe, but maybe not.

The catalyst for the share price falls was the announcement of the bank levy in Morrison’s budget. The levy will cost the banks $1 billion in the first year, and up to $6.2 billion over four years.

But, in reality, this is just one factor that will impinge upon the banks’ profitability over the next few years.

There is the slowing housing boom, which will affect mortgage revenue, and a move away from high-fee superannuation products. The rising shift to SMSF structures are also steering clear of bank retirement products.

Not to mention slow wage growth and a general uneasiness in the state of the economy at large.

There are also regulatory issues playing out that require banks to hold more capital. This reduces their ability to lend out as much money as they previously could.

I think that if you view this as a buying opportunity, you can afford to wait a little longer to try and pick up a bargain.

Further falls to come

My take is that, over the next few months, we will see more falls in the share prices of the big banks. These falls will be roughly the same magnitude as last month.

There are two reasons for this.

The first is psychological.

Technically, there has been a breach of a long-term uptrend line stretching back to 2009. What this means is that a key area of support traders look to has been broken.

Although non-chartists might be sceptical, chartists and quant traders see such signs as big opportunities. This in turn encourages more short sellers to start looking at these banks as targets and planning trades to bet on the share price falling further.

Unless a wave of buyers comes in to counter them, they can be a pretty powerful force in the short term.

Now, if the fundamentals start to pick up, buyers will come in and push this back above the long-term trend line, scaring away the short sellers.

But if the fundamentals align with the charts, further falls of 12–18% are possible in the next two to three months.

Any signal of panic, such as a rise in bad debts, will facilitate such moves.

These falls could even act as political pressure for the government to change the terms of the banking levy. Possibly the introduction of a sunset clause to determine a date when the levy no longer applies.

After all, voters are bank stock holders as well, through superannuation at the very least.

If it does play out like this, a bounce-back in prices could be in everyone’s interests, at least in the short term.

Final thoughts

Governments have a generally terrible record of taxing specific industries at the right time. Remember the mining tax?

It didn’t raise one cent…

Although I don’t think it is in the government’s interest to cause a banking share price fall, the market will be the ones to decide the ultimate fate of the Big Four banks.

In the short term, the market appears very wary on the future profitability of the Big Four banks, which are the most profitable banks in the world.

Can that continue?

Ryan Dinse,
Money Morning


Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia