Don't bank on bank stocks for sleep easy returns
For the better part of three decades, the big banks have been mainstays of balanced portfolios. But their stress-free status is now being seriously challenged.
The major Australian banks, with their stable, franked dividends and implicit government guarantees, will always be a mainstay of investment portfolios. But as several closed the books on a September year, their attraction is fading.
As Morgan Stanley analysts write in a new report, tellingly called The Wounded Oligopoly, “we believe industry conditions remain challenging, growth prospects are weak and profitability is falling” - and that’s despite hopes for an economic soft landing and healthy balance sheets.
Banks are essentially a leveraged play on economic conditions. Over the cycle, lower economic growth means lower profits. Meanwhile persistent inflation is increasing costs. And the potential for higher cost of living and interest rate pressures to lead to an increase in bad debts.
Some argue this is more than a secular shift - or if it is, the cycle is much longer than the more usual two or three or four years. Jefferies head of research Matthew Wilson calls it a “regime change” for Australian banks.
