Australia Bank Valuations at Pre-Crisis High on Dividends

Jan 20, 2014 12:24 am ET

(Updates with closing stock prices in eighth paragraph.)

Jan. 20 (Bloomberg) -- Australia’s largest banks are trading at the most expensive levels since before the global financial crisis on bets a mortgage lending recovery will allow them to increase dividend payouts.

Shares of the so-called Four Pillar lenders led by Commonwealth Bank of Australia have rallied more than 30 percent since November 2011 when the central bank began the first of eight interest-rate cuts to bolster economic growth. The lenders trade at an average of 2.1 times the net value of their assets, the highest since 2007 and a 75 percent premium over the MSCI World Bank Index, data compiled by Bloomberg show.

Investors are betting bank profits will increase -- despite an economic slowdown following an end to the nation’s mining boom -- as record-low borrowing costs allow lenders to stoke demand for mortgages and boost dividend yields that are already the highest in the developed world. Australian banks account for six of the eight highest dividend yields in the 91-stock MSCI gauge, beating overseas rivals from HSBC Holdings Plc to Wells Fargo & Co., the data show.

“The Australian banking sector is going to continue to show nice earnings growth,” Alex Tedder, a New York-based fund manager who helps oversee about $18 billion in stocks including Commonwealth Bank shares at American Century Investments, said by phone on Jan. 15. “Yields are still fairly high and you’ve got a good setup for creating sustained dividend growth that will continue.”

Slowing Economy

The Reserve Bank of Australia has kept its cash rate target at an all-time low of 2.5 percent since August to bolster an economy hampered by a decline in mining exports amid a slowdown in China. Australian gross domestic product expanded by a slower-than-estimated 0.6 percent in the third quarter from the previous three months, government data showed Dec. 4.

Growth in earnings per share for the S&P/ASX 200 Banks Index may slow to 5.1 percent next year from the 7.5 percent estimated for 2014 as lending for mining projects slows, according to analyst forecasts compiled by Bloomberg. Profit for the MSCI World Bank Index’s members may expand 30 percent this year and 9.5 percent in 2015, the data show.

Lower central-bank rates have given Sydney-based CBA, Australia & New Zealand Banking Group Ltd., Westpac Banking Corp. and National Australia Bank Ltd. scope to cut mortgage rates and limit the earnings slowdown with increased home loans.

Stock Prices

CBA slipped 0.2 percent to A$75.32 today in Sydney and Westpac retreated 0.2 percent to A$31.53. ANZ slid 0.5 percent to $30.87 and NAB declined 0.3 percent to A$33.64. The S&P/ASX 200 Index lost 0.2 percent to 5,295.

The average standard variable home-loan rate offered by the nation’s banks has stayed since August at 5.95 percent, the lowest level since September 2009, central-bank figures show. The value of new mortgage approvals jumped 25 percent in November to a record from a year earlier, the fastest pace in four years, according to statistics bureau data.

Commonwealth Bank and its three largest competitors had a mean dividend yield last week of 5.4 percent, the highest national average among developed countries, according to data compiled by Bloomberg. Analysts predict that will grow to 5.5 percent this year, the data show.

Those yields compare “favorably with the cash rate,” David Liu, Sydney-based head of research at Above the Index Asset Management Pty, said by phone on Jan. 15. “The recent improvement in home lending definitely adds to the investment case.” His firm, which manages about $445 million, counts the four largest lenders among its six biggest holdings.

Steve Batten, a Sydney-based CBA spokesman, declined to comment on future dividends or profits before the lender reports earnings on Feb. 12. Spokesmen for the other three lenders also declined to comment.

Too Expensive

The S&P/ASX 200 Banks Index climbed 43 percent through last week since Oct. 31, 2011, before the RBA started its interest- rate reductions. The gain extends to 66 percent when dividends are included. The index has lost 6.1 percent since reaching a record high on Oct. 30.

The rally has made bank equities too pricey for some investors. CBA trades at 2.7 times book, the third-highest among the MSCI World Bank Index’s 91 lenders. NAB is valued at a multiple of 1.8, while Westpac is at 2.1 and ANZ is at 1.9.

Australian “banks are the most expensive in the world,” said Nader Naeimi, the Sydney-based head of dynamic asset allocation at AMP Capital Investors, which manages $131 billion. “If you want to get the financial sector exposure, we’d much prefer to go get it outside the country.” He favors European banks because of the region’s economic recovery.

Loan Growth

The cost of insuring Australian banks’ bonds against default reflects the confidence some investors have in the companies’ prospects. The average cost of credit-default swaps on the four largest lenders fell to a seven-month low of 79 basis points on Jan. 16, CMA data show.

CBA may say on Feb. 12 its net income for the six months through December increased 12 percent to a record A$4.1 billion, according to analysts surveyed by Bloomberg. Profit statements for its three biggest rivals are due in May.

Bank stock prices “are being held up by high dividend yields in a low interest-rate environment,” John Buonaccorsi, a Sydney-based banking analyst at CIMB Group Holdings Bhd., said in a Jan. 13 interview. “New loan approvals have picked up in 2013. You’d expect that to increase growth in loan balances in 2014.”

--Editors: Darren Boey, John McCluskey