Banks popular as yields offer solace in dull market

ROBUST yields and strong ratings have contributed to banks outperforming the market this week, even as the ratings agency Moody's downgraded 15 of the big four's largest global peers.

ROBUST yields and strong ratings have contributed to banks outperforming the market this week, even as the ratings agency Moody's downgraded 15 of the big four's largest global peers.

Over the past five sessions, the banking sector rose 1.2 per cent, compared with a 0.2 per cent drop in the benchmark S&P/ASX 200 index. Even yesterday, in the aftermath of the Moody's downgrades overseas, finance stocks outperformed the broader index, falling only 0.6 per cent, compared with a nearly 1 per cent drop in the index. Among the big four, only ANZ closed flat for the week. National Australia Bank rose 4.75 per cent, Westpac gained 2 per cent, and Commonwealth Bank rose 1.6 per cent.

"The reason the banks are so attractive at the moment is their yield," the head of investment market research at Perpetual Investments, Matt Sherwood, said. "There appears to be below-market average earnings risk."

Banks' dividend yields are in the area of 6 per cent to 7 per cent. This can work out to as high as 10 per cent fully franked.

The big four have also maintained their AA- ratings with stable outlooks from the credit ratings agencies. In contrast, JPMorgan and Morgan Stanley have been downgraded by Moody's.

In its ratings review, Moody's said the long-term prospects for banks' profitability and growth were shrinking, and it was especially concerned about banks with significant financial market businesses.

Despite not being hit by the downgrades, Westpac has made contingency plans in the event wholesale funding markets dry up because of the global jitters.

The Westpac chief executive, Gail Kelly, said the situation in Europe was concerning, but it wasn't a surprise.

"We planned for greater downgrades, we planned for continued volatility, we planned for, at various times, markets simply being unavailable," Ms Kelly said yesterday.

Banks are also less reliant on overseas fund markets because of soft loan demand and higher levels of local savings.

"We are meeting [loan] demand, it's simply that demand isn't there because of the caution that exists at the moment," Ms Kelly said. "We can stand back and watch the activities in Europe and don't need to participate in funding activities there until we find the right window of opportunity."

The prices of credit default swaps, financial hedges used to protect against losses, have also eased for banks, despite overseas worries.

The CBA analyst Ben Zucker said expectations for more stimulus measures from central banks and the "relative comfort with Australian risk" had seen a reduction in credit default swap spreads to about 160 basis points from 200 basis points earlier this month.

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