Behind the bank stock rally
The big four may be sitting on billions of dollars in excess capital — which might help explain the surge in their share prices over the past year.
The economy is looking rather bleak. But not quite as bleak as overly cautious banks had budgeted for. That means the 'big four' might be carrying too much capital and higher than necessary provisions to cover bad debts.
They may be able to hand some of that extra capital back to shareholders via buybacks or special dividends, or at least use it to underwrite provisions over the next couple of years.
This alone could go a long way towards explaining what many in the market regard as unsustainably high bank share prices.
Shares in the big four have all outperformed the broader market and rallied well beyond analyst price targets over the past year, with NAB leading the charge (up 38%), followed by Westpac (+31.5%), CBA (+29% to last week set fresh record highs) and ANZ (+26%).
