Banks' $47b bonanza as buyers back recovery

Investors piling into the banks this week are backing the emerging recovery, with the monster buying spree underlining growing optimism that the economy will emerge from the pandemic in better shape than previously expected.

The banks have been on a startling run, with the S&P/ASX 200 banks index up 18.3 per cent this week by the close on Thursday as Commonwealth Bank, Westpac, National Australia Bank and ANZ led the sector to a $47.3 billion advance.

The background to the bank buying is that "we are starting to see the economy open up," said Jason Kururangi, portfolio manager at Aberdeen Standard Investments.

"The market is just warming to the fact that the situation may not be as bad as feared for the banks. I still think that the next reporting season is going to be pretty dire but I think that a lot of that was already in the share price."

While the sharp rebound for the banks is just a portion of a 44 per cent slide since the market started to collapse in February, it's a heartening sign for shareholders who watched in dismay as dividends crumbled and provisions soared.

At the centre of the gloom around the banking sector were deep investor worries about the potential for a large increase in bad debts as those that lost their jobs endured much greater levels of financial stress.

In times of crisis, "in banking there is always a fear of the unknown. No one knows how much of the loan book goes south," said Mr Kururangi.

Support measures

But the government put in place its JobKeeper and JobSeeker labour market support programmes along with other measures to help the economy, at the same time as taking an early, firm line on controlling the spread of the virus.

The effectiveness of these measures is starting to become apparent, with the country slowly emerging from lockdown as the number of new cases continues to dwindle. Regional travel is set to start again imminently in New South Wales and the ski season will kick off on June 22.

The improving economy drew a mention on Thursday from Reserve Bank of Australia governor Philip Lowe, who said "the economy is doing a bit better than was earlier feared. People were talking about a six-month hibernation. But businesses are opening up now."

"Fundamentally, the economic situation seems to be better than the market had been expecting," said ST Wong, chief investment officer at Prime Value Asset Management. "The government has been on the front foot about getting the economy back on track."

The banks had been heavily punished in the weeks leading into the rally. "They are a proxy for the economy," said Mr Wong.

JPMorgan's bank analyst team noted that, prior to this week, ANZ was trading at 0.7 times book value, while National Australia Bank and Westpac traded about 0.8 times. Commonwealth Bank was trading at a "stretched" 1.5 times.

"There were unprecedented levels for the banks, which arguably should be able to earn their cost of capital in the long run given market structure and scale," the analysts said.

"They were trading near all-time lows on price to book. Particularly ANZ, NAB and Westpac," said Mr Kururangi.

"When banks trade below book value, that's a historical buying trigger" especially for value investors, said Mr Wong. "That's what's happened."

Value

Investors tend to move to value when they believe that an economic recovery is taking place. "A move to cyclical sectors as the economy recovers is a reasonable step," said Mr Wong adding that, in Australia, that has historically manifested as a move to financials, energy and building materials firms.

He is also comforted by a strong ongoing level of residential property inquiries given the bank sector's dependency on mortgage loans.

"There is interest in the property sector still - although that is contingent on the unemployment rate which is being artificially held up by JobKeeper," he said. September and October will be the key months to measure unemployment, he said.

Some of the gains for the banks this week were likely technical said Mr Kururangi. as long-only funds played catch-up and hedge funds closed underweights. "There was the realisation and then came putting it into action."

The next milestone for bank investors will be Commonwealth Bank's full-year results on August 12. They will give investors some idea about how conservative provisioning levels for bad debts have been relative to the economic recovery, Mr Wong said.

"While the full picture likely won't be known for three-to-six months, the market view at the moment is that they have done enough with provisioning" and capital and liquidity aren't a problem for the sector, he said. "That's why money is going into banks."