Is there Value in the Big Four Banks?
At Montgomery, we spend quite a bit of time talking to broking analysts to try to deepen our understanding of industry dynamics. Sometimes we get a good return on that investment of time, and this was the case recently when we sat down with UBS to talk about banks.
One of the things we took away was a straightforward account of some pricing dynamics currently at play. As you will know, official interest rates have been low for some time and that’s impacting deposit rates. More recently however, an improving mood in wholesale funding markets has meant that Australia’s Big Four banks have had access to wholesale funding at significantly better rates than they saw 12 or 18 months ago.
With cheap funding becoming available there, the Big Four are less interested in competing for term deposits, and so term deposit interest rates have fallen to the rather unattractive rates we’ve been seeing more recently.
When a term deposit investor is confronted with these unsatisfactory rates, their inclination is to seek out a better level of income somewhere else. In Australia, that somewhere is often shares; in particular – shares in the Big Four banks.
So, improving wholesale funding markets combined with already low benchmark rates is herding investors into bank shares, and supporting bank share prices.
Which may prove to be fortuitous for the banks in the event that the Murray review concludes that the Big Four need to think about raising additional equity.
Investors should also consider how these dynamics could work in future when interest rates start to rise.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
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.
