Opinion
The one player fuelling the $148b bank bonanza
Clancy Yeates
Deputy business editorOne of the biggest surprises for investors in the Australian sharemarket this year has been the staggering rise in big bank share prices.
Despite analysts repeatedly warning it’s hard to justify the values of the major banks – especially Commonwealth Bank – the market has paid no notice and bank share prices have continued to defy gravity.
This year’s surge in bank shares has been a major talking points in markets.Credit:
Now, you might think ballooning bank valuations sounds like an arcane debate best left to finance types. But it’s an issue that indirectly affects most of us because super funds that hold our retirement savings are also involved in this story. It also highlights one reason regulators are more concerned about the potential risks in the $4 trillion super pool. More on that later.
First, some figures – and they really are enormous. Since the end of 2023, the combined market value of the big four banks has jumped by about $148 billion, to just under $590 billion.
Shares in Westpac are up about 42 per cent this year, CBA 39 per cent, NAB 26 per cent and ANZ 20 per cent. CBA’s value has swelled by about $75 billion since the end of 2023 (that increase alone is roughly twice the size of Woolworths).
CBA’s share price rally has made it by far the biggest company on the market after it overtook BHP in the second half of the year.
Getting more technical, commonly used metrics used to value companies are also off the charts on banks. A popular way to value a business is to compare market value with its profits, known as the price-to-earnings ratio, which is also at record highs for banks.
Has this great explosion in bank valuation occurred because the market has suddenly decided Australian lenders are far more profitable than they were at the start of the year? Not really, though their outlook has improved a bit.
The big four’s combined profits fell this financial year, dividends edged up, and there were share buybacks. The outlook is for profits to basically be flat – which, to be fair, is not as bad as some expected. But the point is, there hasn’t been some drastic improvement in the banks’ outlook that you’d normally expect to send their shares soaring. So if booming profits aren’t driving the great bank share rally, what is?
There are plenty of theories, but one interesting discussion point in the market is the sheer amount of money flowing into bank shares from large investors, including super funds.
A report from Macquarie analysts in September said super funds had been “the clear standout buyers of bank shares” in the year to June, splashing about $6.4 billion on bank stocks. Funds didn’t appear to be putting a bigger share of their assets into banks, it said, the buying simply reflected the inflows of money into super – the funds have to do something with all the cash employees contribute.
The Reserve Bank also said in September that super funds had over the years built up their ownership of Aussie banks’ equity to around 25 per cent, and they also owned about 30 per cent of the short-term debt issued by banks. The RBA said we should keep a close eye on these growing links between big banks and big super because this could “amplify shocks in the financial system.”
In October, JP Morgan strategist Jason Steed did a deep dive trying to unravel the “conundrum” of surging bank shares. Looking at a range of data, he concluded that super funds had increased their positions in banks, not including external fund managers used by super funds.
Of course, super funds aren’t the only big investors buying the banks – no doubt other fund managers have been doing it too. But why would these big investors be particularly attracted to banks?
One theory is that the banks look more attractive than the other big sectors on the ASX right now – the miners and industrials – so money is flowing to them by default.
Sproule explored this idea last week, saying the performance of the banks has been helped by the fact that there are “very limited options available to large institutional investors across the ASX”. There are banks, miners (whose prospects don’t look great when China’s economy is spluttering), and industrials (where profit and revenue performance has been “very mixed” because it depends on whether companies can pass on their higher costs to consumers).
The banks’ underlying businesses (as opposed to their share prices) have put in solid performances for investors, without punching the lights out. The cutthroat competition in the mortgage market has eased, helping profit margins, and there has not been a dramatic rise in mortgages or business loans going sour.
So, is this as good as it gets for the banks’ share prices?
Some, such as Sproule, which has a “sell” on the big four, are convinced things will get tougher for the banks from here. When the RBA eventually cuts interest rates, most believe it will pinch bank profits.
No CEO would dare to withhold part of any cut from borrowers to prop up their bottom line. Last week’s backlash against CBA’s $3 “assisted withdrawal” fee showed the strong anti-bank sentiment among the public and politicians.
At the same time, betting against the big four is known as a risky move in the financial world. Indeed, going “short” against the big banks – betting on a falling share price – has been dubbed a “widow maker” trade in financial market parlance.
No doubt the debate over whether four Australian banks are really worth almost $590 billion has much further to run. One thing we can be sure of is that almost all of us are exposed – to the upside and the downside – via our superannuation accounts.
Ross Gittins is on leave.
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