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Charts review: big four Australian banks CBA, ANZ, NAB, WBC

March 7th, 2011 · Greg Atkinson · 26 Comments

Well today the stock market correction that I mentioned was coming in February has certainly hit and the ASX All Ordinaries Index has fallen below the 5000 level yet again.  Is this latest share market correction something Australian stock market investors should worry about, or is it simply an over-reaction to global events which will have little long term impact on stocks and shares?

For those readers who think I am simply jumping on the correction bandwagon I will refer to what I wrote on the 18th February when most mainstream media market watchers were giddily talking up the market after it has pushed through 5000.

In my post:  Charts Review: All Ords, Telstra, Qantas, BHP & Woolworths I made this comment:

“At this stage I feel we are likely to see the market correct again soon and then start to move sideways again…”

So it will not surprise readers that my outlook for the Australian stock market over the next few months is that it will basically move sideways and we will once again get stuck in a fairly narrow trading range.

Remember I am not a market bear by nature and that during the darkest depths of the global financial crisis I consistently stated that the global financial system was not about to implode, paper money would not become worthless and that stocks would find a bottom and rally upwards again.

So why you may ask, do I sound increasingly bearish of late about the outlook for the Australian  stock market?

Let’s have a look at the charts of the big four Australian banks and see what might be worrying me.

CBA vs ANZ, NAB and WBC –  stock prices chart over 10 years

cba-wbc-nab-anz-10-year-chart-mar-11

The chart above shows the stock price movements for the big four Australian banks – Commonwealth Bank of Australia (CBA), Australian New Zealand Banking Corporation (ANZ), National Australia Bank (NAB) and Westpac (WBC) over 10 years.

The most striking feature of this chart is that it highlights how poorly NAB has fared compared to the other three major banks even before the global financial crisis struck.  Much of the under-performance of the NAB stock price stems from some costly attempts to expand overseas and a case of staff fraud related to foreign currency transactions in 2004.  All in all, things have not panned out that well for NAB shareholders.

You can also see how the bank stocks initially bounced back very strongly after hitting their lows in late 2008/early 2009 but then have struggled since early 2010.  This suggests that although the banks have been reporting huge profits recently, investors are remain cautious about their outlook over the short to medium term.

CBA vs ANZ, NAB and WBC –  stock prices chart over 5 years

cba-wbc-nab-anz-5-year-chart-mar-11

A look at the same bank stocks over just the last 5 years shows how the Commonwealth Bank has led the pack and despite the best efforts of the new team at NAB after 2004,  it’s share price still under-performed the other major banks.

Again this chart shows the rally off the lows seen in late 2008/early 2009 and the rather subdued share price performance for all four banks over the last 12 months after a significant correction during the early part of 2010.

So despite Government guarantees covering deposits and a strong housing market, the big four banks have still been unable to hold above their pre-GFC levels with all but the CBA trading around prices seen in 2006 or lower.

Like I have said many times, if the Australian economy is truly booming then it seems strange that so few stocks are reflecting this.  This worries me.

Finally let’s have a look the Australian All Ordinaries Index (XAO) versus the best performing major bank stock, CBA and the mining giant BHP Billiton.

Australian All Ordinaries Index versus CBA and BHP – 5 years chart

xao-cba-bhp-5-year-chart-mar-11

Quite clearly BHP (and many other mining stocks) have been the place to be for the last few years although stocks like CBA have also provided some healthy returns  if investors were able to get in while prices was relatively low.

What concerns me about this chart is that shows how mining related stocks like BHP are propping up the ASX All Ordinaries.  Certainly bank stocks like CBA, ANZ and WBC are also helping to support the Australian stock market to a lesser extent but without doubt, it’s the mining companies that have been responsible for most of the post financial crisis gains.

So from this point a few things could happen.  Firstly the banks could rally and drive the market higher and if the miners head higher as well, then the ASX All Ords and ASX 200 would  easily push past 5000 again.

Another possibility is that the miners will gently fall back but the stock market will move sideways as the banks slowly creep up over the next few months.

Lastly if commodities prices correct (which I expect they will at some point) then most mining stocks would see their stock prices fall.  This would rattle investors and bank stocks would be sold off as well sending the ASX All Ords well below 4800 and probably down near 4600.

I expect the market to move sideways as I indicated earlier but as the year progresses I would not be surprised to see the market undergo a major correction as commodities prices come off the boil.  I have been waiting for this correction for months and so if it doesn’t occur this year then obviously I have  not been reading the tea leaves correctly.

So with attractive bank deposit interest rates on offer I am inclined to be a seller of stocks when they rally and not a buyer of stocks even during corrections,  unless I spot a company whose stock appears considerably undervalued.  At this point of time there are not many of these stocks around in my view.

Current geo-political events at this stage appear unlikely to have a long term impact on stocks, but they do highlight how nervous investors are and how willing they are to sell off holdings at the first sign of trouble.  This suggests to me that we are unlikely to see a major stock market rally over the next few months and that the downside risks outweigh the upside risks.


26 responses so far ↓

  • 1 Biker // Mar 7, 2011 at 10:02 pm

    Pre-GFC, it was relatively easy to get finance for housing projects. Recently I took a folder full of photos of our homes to see our bank manager. I was testing my missus’ theories on repayment of all loans vs running numerous (fully-funded) offset accounts instead.

    The bank manager was astonished to see what we were holding… and made the comment that it was much easier ‘back then’* to get loans. I’m concluding that it’s extremely difficult to get loans now. If that’s so, _far less lending_ is happening.
    The banks just aren’t doing the volume they were, in their perceived lowest-risk sector (housing), prior to the GFC.

    Does this mean:

    – Banks themselves see far more risk in lending (even for homes) than they did?

    – This revised risk assessment, erring on the side of caution) is costing them megabucks?

    – If risk assessment is revised downwards, we’ll see increased competition for home borrowers?

    – If it does get ‘easier’ to borrow, we’ll see property pick up, particularly where couples can demonstrate high incomes?

    I believe the answer to all four questions is YES…

    Not arguing this is the most desirable outcome for Australia, rather considering what is most likely to happen, in the light of your data, Greg.

    * We took on a couple of extra loans just over two years ago.
    “Back then” ??!!~

  • 2 Greg Atkinson // Mar 8, 2011 at 8:35 am

    Biker I reckon your assessment looks pretty good to me. I recall before the GFC that my e-mail inbox was frequently hit with e-mails from the banks talking up home equity and margin loans but these days I don’t see many of those e-mails at all.

    I would imagine that the big banks did quite well out of the Government bank deposit guarantee which would have set funds their way and also from the first home owners schemes (state and federal) which were tweaked to lure people into the housing market.

    But over the next few years I wonder where they will be able to keep growing earnings?

  • 3 Biker // Mar 9, 2011 at 12:35 am

    The temptation to relax the rules will be just too great, Greg. Already Gail Kelly’s mea culpa sends ‘Come back, come back!’ signals to enraged homeowners. It would be fascinating to see what the CBA and WestPac have already lost in custom, due to their near-doubling of the RBA’s recommendation.

    These two banks must particularly fear new Government policies to be introduced in just over three months. How many more angry customers will walk once there’s no penalty for switching banks?

  • 4 Biker // Mar 9, 2011 at 10:29 am

    This may also have been what my bank manager was referring to:

    finance.ninemsn.com.au/moneymag/latestmoneyarticles/8216560/new-home-loan-trap

  • 5 Biker // Mar 12, 2011 at 9:33 pm

    Why would SteveNG ask that? Because he’s blocking my specific responses to his assertions, Ned. I’ll beat this… as I have in the past. Stay tuned Monday!~ 😉

  • 6 Firebug // Mar 13, 2011 at 5:34 pm

    Greg,

    Hope you’re OK with the earthquake in Japan.

  • 7 Greg Atkinson // Mar 13, 2011 at 10:01 pm

    Thanks FB I am fine, I have just been distracted by the terrible events here. We all live near a fault-line or two in Japan so earthquakes are a contact danger but this disaster is off the scale. Thanks for your concern!

  • 8 Biker // Mar 14, 2011 at 10:57 am

    Good to hear you’re still on deck, Greg.
    Take care…

  • 9 Greg Atkinson // Mar 14, 2011 at 5:57 pm

    Thanks Biker..I am still here, just a little subdued by events.

  • 10 Ned S // Mar 15, 2011 at 4:08 pm

    Good to hear you are still alive and kicking Greg. I’ve been watching the site since the day after for signs of activity – Saw some tweets change – I think? But still wasn’t sure. Keep head down and chin up maybe eh mate? (Hope that doesn’t sound too banal – As it’s all obviously bloody horrific.)

  • 11 Greg Atkinson // Mar 15, 2011 at 6:46 pm

    Thanks Ned. I am fine, just trying to take everything in. Fault lines can be tricky and you never know what they will do next. Cheers!

  • 12 Ned S // Mar 15, 2011 at 7:58 pm

    Goodo mate! Regards your main article, I think we all pretty much agreed that there seemed to be something just a bit dysfunctional about Rudd’s basic brain functioning a good while back? As to the “Pearl Harbour” crud, Jeez people aren’t even required to prove sanity before becoming parents – So it’s pretty likely you’ll trip over the occasional nutter on the net. Though I’d be wanting to cut someone’s guts out as well if I had to put up with similar comments in an equivalent situation!

    Please keep us informed. (Though I’ll also watch the Japanese media stuff as you recommend.) And even one bloke from back on DRA who never quite seems to have found his way here has been asking about you. So you are in LOTS of people’s thoughts pretty obviously.

  • 13 Greg Atkinson // Mar 25, 2011 at 3:32 pm

    Thanks Ned. I am slowly getting back to looking at the stock charts etc. after the terrible events here in Japan over the last few weeks. It’s going to take a long time for Japan to recover from the earthquakes and Tsunami on March 11th but figure I won’t be helping if I don’t get back to work.

  • 14 kill_city // Dec 1, 2011 at 10:34 am

    @ BIKER

    – Banks themselves see far more risk in lending (even for homes) than they did?

    The way to look at bank lending is that it’s al based on mitigating risk and risk is there on several front. Pre GFC risk was lower. There several factors involved in measuring risk including pricing, security, value of said security, access to funding, banks current balance sheet, exposure to various markets. If Banks are engaged too much in a particular sector they try diversify risk by engaging in other sectors. Soo an over exposure in resi lending might be offsett by a push for liabilities (i.e. deposits).

    – This revised risk assessment, erring on the side of caution) is costing them megabucks?

    Costing megabucks is all proportion ratio of revenue. Banks want business but banks also want the right business. Being selective in lending projects where the T&Cs minimise the Banks risk ideal as it positions them to engage in further business down the track which they may not have been able to if they took every deal that was brought forward to them and met their criteria. Reveue is important but it needs to be sustained and how you sustain this revenue is based on how you plan your lending and what deals you engage in. So in the long term being tight now maybe be more profitable in the long run.

    – If risk assessment is revised downwards, we’ll see increased competition for home borrowers?

    don’t really understand your question here.

    – If it does get ‘easier’ to borrow, we’ll see property pick up, particularly where couples can demonstrate high incomes?

    easier to borrow will be based on several factors..i.e. couple having capacity to take on higher debits. By that I don’t mean being able to borrow more but meet increased pricing. I think this wont make the market more competitive. What will make the market more competitive and easier for couple to borrow money would be increase in supply of money to banks from markets and a reduction in the pricing of this money. Another factor I think would make it easier and make the market more competitive would be a reduction in govt regulation addressing th real issue of housing in Australia an undersupply of property. This is key because this will affect the pricing of property and make it more affordable hence allowing consumers to borrow less, which means the banks in the first place dont need to lend as much thus not requiring to purchase as much money.

    Hope that helps bro =]

  • 15 Biker // Dec 1, 2011 at 5:55 pm

    Thanks for your views, KC.

    In 35 years buying, building, selling and leasing, we’ve never seen so much competition between the Big Four.

    And, despite reduction in residential construction, lacklustre property sales and apparent lack of confidence, the banks are raking in record profits.

    Next Tuesday’s RBA announcement will be interesting. Will it mark the beginning of a series of interest rate reductions?
    At what point might renting seem expensive against buying?
    That’s probably as important a factor as undersupply.

  • 16 Lachlan // Dec 1, 2011 at 7:51 pm

    “At what point might renting seem expensive against buying?”

    $1000/wk average rent in Chinchilla the RE agent told me BP. Predicted to double in coming years.

  • 17 Stillgotshoeson // Dec 1, 2011 at 7:56 pm

    Banks have been downgraded. High chance cost of funding will rise even more for the banks now.

  • 18 Lachlan // Dec 1, 2011 at 8:08 pm

    But then I guess my point is irrelevant because mining boom towns are every and always a little world of their own….and the money quickly dilutes as it trickles out to the surrounding local economies.

  • 19 Biker // Dec 1, 2011 at 8:44 pm

    Lachlan: “I guess my point is irrelevant because mining boom towns are every and always a little world of their own…”

    We have _nothing_ in mining boom towns, but a new tenant has just paid us a _year’s_ rent in advance, Lachlan. Our agent has never experienced this before. We genuinely believe rents may now double every decade. We have no problem with a flat market, lack of confidence or reduced construction.

    To have one’s rental income increasing over 10% annually in retirement beats the 6.25% we’re getting in online accounts.
    The property bears are working _for_ us… . 😀

  • 20 Ned S // Dec 2, 2011 at 3:30 pm

    It’s getting ugly in the real world. I’ve starting having unwanted thoughts that involve words like “work” and “job” – My lady is even supportive. Bugger! 🙂

  • 21 Not Fooled By Property Spruikers Hype // Dec 3, 2011 at 7:45 am

    Greg

    Unfortunate you removed my questions challenging Bikers assertions. No harm done. He knows I won the discussion.

    It is illegal for a agent to accept 1 years rent in advance in WA & Bikers agent would lose his licence if he did but instead of answering a legitimate question he went down the path of personal attacks?

    More the pitty you left his comments up

  • 22 Greg Atkinson // Dec 3, 2011 at 3:29 pm

    NF it is pretty unfortunate that people post comments related to the WA property market in response to a post that looked at the charts of the major banks.

  • 23 Not Fooled By Property Spruikers Hype // Dec 3, 2011 at 8:53 pm

    Sorry Greg

    I did not wish to bring on a discussion about WA Property.

    I was questioning Bikers far fetched assertions that a tenant would pay a years rent in advance, but even if they did a real estate agent would not be able to accept it without being in violation of the WA Tenancy Act.

    I must say you have the patients of a saint

  • 24 Biker // Dec 3, 2011 at 10:13 pm

    NF: “I did not wish to bring on a discussion about WA Property.”

    That’s what we need. More humour on this site!~ 😀

  • 25 Not Fooled By Property Spruikers Hype // Dec 3, 2011 at 10:20 pm

    Biker

    Caught in a lie “One Years Rent in advance”

    Illegal for a RE Agent to do in WA

    ” Paying rent…..A landlord must not ask for more than two weeks’ rent in advance before or during the first fortnight of a tenancy. After that, the agreement can provide for rent payments on a weekly, fortnightly, four-weekly or calendar-month basis or any other period as agreed by you and the landlord…..The landlord must not ask for rent until the period covered by the previous payment is finished.End of discussion”

    Would you like a link with that as requested here it is: http://www.commerce.wa.gov.au/consumerprotection/content/Property_renting/Renting_and_tenancy/Tenants/Bonds_and_rent.html

    If you are going to pretend being a landlord do some background research at least.

  • 26 Greg Atkinson // Dec 3, 2011 at 11:33 pm

    Okay enough now please lads. If you want to make an observation about house prices etc the please to be is here: http://www.shareswatch.com.au/blog/australia-house-prices-and-real-estate-discussion/

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