MARKETS SPECTATOR: Clyne spurs the banking bulls

The National Australia bank chief says as interest rates fall Australia's banking sector will remain attractive to investors, though some analysts are not so sure.

Ask Cameron Clyne if investors will continue to pile into bank stocks and the National Australia Bank chief executive will reply bluntly. “As interest rates go down people are going to look for yield," he told Business Spectator.

National Australia Bank increased its half-year dividend to 93 cents yesterday, fully franked. That represents a payout ratio of more than 75 per cent of the biggest Australian banks' profits, according to Clyne.

In a world where chief executive pay is linked to share price, Clyne’s remarks shouldn’t come as a surprise. But he seems circumspect about the 44 per cent gain in his bank's stock price over the last 12 months – more than double the gain in the S&P/ASX200 index.

Clyne was unwilling to comment directly as to whether he thought the bank’s stock had risen too far, too fast. But analysts are not so reticent.

Citigroup’s Tony Brennan says this week’s rate cut by the Reserve Bank will help bank net interest margins, while bad debt pressures are "benign".

National Australia Bank's NIM rose two basis points in the six months to March 31. Its ratio of 90 plus days past due and gross impaired assets to gross loans and acceptances, fell four basis points to 1.74 percent as of March 31.

While it's tempting to see everything as tickety-boo for the banks, Citigroup’s arch nemesis in assessing the banks, UBS, says banks are expensive. The sector’s price to earnings, at more than 14 times forecast earnings, are “as high as they’ve ever been” excluding the immediate post-GFC period, according to UBS strategists David Cassidy and Dean Dusanic.  

Cassidy and Dusanic argue the recent leg of the stock market’s rally has been narrowly focused on the banks. That’s dangerous for stock market bulls, they say, as it indicates that the impetus for stocks to move higher is “running out of steam”. Still, mining stocks, say Cassidy and Dusanic, are “showing signs of life” and may propel the market a little higher.

UBS retains its year-end forecast for the S&P/ASX200 Index at 5200. The index closed yesterday at 5198.381.