Yield play on

Bank stocks may be back in vogue as yields in Australia drop as the market prices in a rate cut.

No prizes for guessing what’s in store for Australian stocks today. Up, up and away.

But as one of the first markets yesterday that was able to fully digest the Federal Reserve’s recommitment to monetary stimulus for the foreseeable future, the S&P/ASX200 Index’s 1.3% gain yesterday was muted cheer. The benchmark index has enjoyed a 3.3% increase this week but trade has been thin amid the release of economic data, which has as its only silver lining that it may back the Reserve Bank of Australia into a corner where it will have to cut its cash rate even lower.

That’s good news for the banks. Some analysts, such as Perpetual’s Matt Sherwood, reckon the “yield trade is back on”. Citigroup’s Craig Williams, one of the most bullish bank analysts, is probably not alone among his peers when he said this week that there is “no threat to dividend payouts” from the banks even if earnings slip (see John Abernethy's Bank stocks a hold strategy).

Williams expects a prospective yield of 5.9% for the banks. That looks pretty good compared with what investors can get elsewhere. The yield on the Australian 10-year government bond fell to 3.72% yesterday and a Reserve Bank cut would probably depress that yield even further.

Bank share prices are also on a bit of a tear. ANZ Bank shares are up 9.2% since June 12. Commonwealth Bank has gained 9.8% since June 7. National Australia Bank has added 6.9% and Westpac shares have risen 7.4% since June 12.

As depressing economic forces conspire to push the Reserve Bank into an August rate cut the robust franchises of the big four Australian banks, which have cannily raised their payout ratios look set to keep their stock prices buoyant, at least a while longer.

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