The Bank Sector
19th May 2017
The bank sector is down 9.9% from the top in three weeks capped by a week of Budget based bank bashing. There are four golden rules of the Marcus Today newsletter, never pass an opinion on Religion, Sport, or Politics…so here is an observation. I find it quite incredible how antagonistic towards the major banks Scott Morrison and Treasury has become in such a short time. Surely there is a relationship to be maintained between the government and the banks. Surely the government should be promoting an accord with the banking industry as a vital pillar of economic stability. But, caught perhaps out by its lack of groundwork and consultation ahead of the big bank tax announcement, the government has been very publicly castigating them for not welcoming a random tax that appears to have been thought up in a light bulb moment ahead of the Budget. You can just imagine the conversation.
- “Find me $6.2bn”.
- "But the Budget is in three days Boss!"
- "I don't care, find me $6.2bn".
- “Why don’t we get Apple or Google to pay some tax”.
- “Don't be stupid, they're far too clever for us”.
- “So why don’t we just get the banks to pay it”.
- “But they already pay $11bn a year in tax”.
- “Yeah but everybody hates them already, it’ll win us some votes, get the Labor Party off our back about a Royal Commission, it’ll distract everyone from the rest of the Budget and make sure the whole lot sails through Parliament”.
- “Can we do that?”
- “You’re ScoMo Boss. You can do whatever you like”.
- “But what about everyone’s Super, the SMSF industry has 30% of its retirement savings invested in the big four banks?”
- “Don't worry about those fat cat retirees Boss, they’ll always vote for us anyway”.
- “But what about Anna Bligh and the ABA”.
- “OK, good one Joe 90. Let’s do it.”
(High fives and schoolboy sniggers all round).
Another worry is that this breaks the seal for future governments to randomly target any corporate, without notice, that is profitable. What next…higher tax rates for companies with a 20% ROE?
For the government to respond to the banks by being outwardly hostile and dismissive of their objections is not good for share prices, or rather, hasn’t been good for share prices.
But logic and politics aside, where does it leave the banks? This is the Bank sector on a daily basis. The most obvious technical observation is that on a daily basis the RSI is at 26 and the sector is officially oversold - the last time that happened was June last year and the sector jumped 31% thereafter. The sector is already off 9.9%.
Here are the numbers. They are beginning to look cheap again. The NAB is on a 9.2% yield including franking. WBC on 9.6%. This is getting to the bargain end of sector pricing.
Of course all the majors have just gone ex dividend (except CBA) so there is no rush to buy for income and on the seasonal chart there is no urgency to buy. This is the seasonal chart of the banks since 2000 (the average of the sector’s performance over a calendar year). You can see the average in white and the performance so far this year in orange. This tells you that whilst the sector usually peaks late April (as it has done), just ahead of dividends and results, slides for two months then rallies into the next results season, this year at least we have already seen the slide happen in the last three weeks.
We have in fact dropped more than the seasonal norm in three weeks instead of in two and a half months. If this chart has any credibility it says the horse has bolted as far as selling the banks is concerned. To me this looks like a sentiment hole that is more likely to improve than deteriorate and to sell now is to give into fear. We should be looking to buy instead. It might be better to wait for them to start to rally before buying, there seems to be little rush after the dividends are gone and with the US market destabilising, but selling them now is following the herd not leading it. This is how you sell at the bottom. The sector will settle and remain a core income investment for retirees.
For fund managers, who only care about a sector’s relative performance, the other comment is that the sector is very likely to outperform a falling market now. In which case, it’s time to think about going overweight.
This is an opportunity not a disaster.