Big four up despite global downgrades

ROBUST yields helped Australia's banks outperform the sharemarket this week, despite ratings agency Moody's downgrading

By InvestSMART · 23 Jun 2012

By InvestSMART ·
23 Jun 2012

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ROBUST yields helped Australia's banks outperform the sharemarket this week, despite ratings agency Moody's downgrading 15 of the world's biggest banks.

Over the past five trading sessions, the banking sector has risen 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, Australian finance stocks

outperformed the broader index, falling only 0.6 per cent, compared with a drop of nearly 1 per cent on the benchmark index.

Among the big four, ANZ closed flat for the week but National Australia Bank climbed 4.8 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," said Matt Sherwood, head of investment market research at Perpetual Investments. "There appears to be below-market average earnings risk."

Australian banks' dividend yields are in the area of 6-7 per cent, which can be 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, even as global giants such as JPMorgan and Morgan Stanley were downgraded by Moody's over Thursday night.

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

Despite not being hit by the downgrades, Westpac has made contingency plans in case wholesale funding markets dry up due to global jitters.

Westpac chief executive Gail Kelly said the situation in Europe was concerning, but it was not a

surprise.

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

Australian banks are less reliant on overseas fund markets due to soft loan demand and higher levels of local savings.

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Frequently Asked Questions about this Article…

Why did Australian banks outperform the broader sharemarket this week?

Robust dividend yields helped Australia’s banks outperform the market. Over the past five trading sessions the banking sector rose about 1.2% while the S&P/ASX 200 fell around 0.2%. Strong yields and relatively lower perceived earnings risk made banking stocks more attractive to investors.

How did the big four banks (ANZ, NAB, Westpac, Commonwealth Bank) perform this week on the ASX?

Among the big four, ANZ finished flat for the week; National Australia Bank climbed about 4.8%; Westpac gained roughly 2%; and Commonwealth Bank rose about 1.6%.

What impact did Moody's recent downgrades of global banks have on Australian finance stocks?

Despite Moody’s downgrading 15 of the world’s biggest banks (including JPMorgan and Morgan Stanley), Australian finance stocks held up relatively well. In the immediate aftermath they fell only about 0.6%, compared with nearly a 1% drop in the benchmark index, and the big four retained AA ratings with stable outlooks.

What are current dividend yields for Australian banks and what does 'fully franked' mean for investors?

The article notes Australian banks’ dividend yields are in the area of 6–7%, and can be as high as 10% when fully franked. 'Fully franked' means the company has already paid tax on the dividends, which can reduce the investor’s additional tax liability on that income (benefit depends on the investor’s tax situation).

Have credit rating agencies changed their view of the big four Australian banks?

No — the big four have maintained their AA credit ratings with stable outlooks from the rating agencies, even as some global banks were downgraded by Moody’s.

Are Australian banks exposed to problems in global wholesale funding markets?

Australian banks are relatively less reliant on overseas funding markets thanks to softer loan demand at home and higher levels of local savings. However, some banks like Westpac have made contingency plans in case wholesale funding markets dry up due to global jitters.

What concerns did Moody’s raise in its ratings review and which banks are most at risk?

Moody’s said the long-term prospects for banks’ profitability and growth are shrinking and expressed particular concern about banks with significant financial market businesses. That assessment underpinned its decision to downgrade several global banks.

What should everyday investors consider about bank stocks right now?

Investors should weigh attractive yields against potential earnings risks. As Matt Sherwood of Perpetual Investments said, 'the reason the banks are so attractive at the moment is their yield' and there appears to be 'below-market average earnings risk.' Still, consider credit ratings, exposure to global market volatility, and your own income and risk needs before investing.