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Have the banks been pushed below fair value?


Have the banks been pushed below fair value?

Slowing growth and tightening profit margins, customers entering financial stress and falling asset values; It sounds like the recipe for a disastrous investment but what if the price of the investment has factored in something even worse, which failed to eventuate?


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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. “investors push bank share relative performances to levels normally reserved for a GFC-like event”. The bank shares are around a 10-12 P/E. Is it a sign of the times how the term GFC is so flippantly thrown around? The banks are no where near priced for potential insolvency which a GFC event would suggest. Rather they seem priced for a material slowdown in the economy which would appear to be at the optimistic end of the scale given what is happening in the property sector.
    The notion that the population may double in the next 35 years would suggest you think turbo-charged growth is viewed as an unquestioned success so far. Is the evidence not to the contrary? Both politically and economically the tide looks like its turning regarding a big Australia. Reversion to the mean population growth would have to be the base case in this scenario I would have thought. And in an economy that is built on population growth and not much else that does not bode well for future growth.

    • Hi Peter,

      For clarity when we refer to the GFC in this column we are talking about the GFC’s impact on the Australian economy, NOT the GFC’s impact on US bank solvency. When we mention the GFC we aren’t doing it flippantly. We are doing it with reference to something very specific and during which I was investing.

  2. Hi Roger – in addition to the risk of regulatory change due to the Royal Commission, there is also a broader risk of significant jump in bad debts, particularly if we see an economic downturn next year as many economists and market pundits are predicting.

    As you’ve described in this blog before, banks are highly leveraged and a relatively small % uptick in bad debts can wipe out significant shareholder value. This is something we saw play out in the early 90’s.

    How do you assess the risk of rising bad debts given the economic outlook, and how does this play into banks current valuation?

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