Why big bank shares are still worth investing
Afterpay might have gained a place in Australia’s 20 largest companies, but it’s still worth having traditional banks in your share portfolio. Here’s why.
Business
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Big four bank shares have been beaten up on the stockmarket in 2020, but steep falls this month by their emerging rivals have helped them regain some respect.
More than 2.5 million shareholders in CommBank, Westpac, ANZ and NAB watched their investments plunge during March’s COVID crash, and then stay down while fellow finance stocks such as Afterpay and Zip Co soared to record highs.
But during September buy now pay later giant Afterpay has tumbled up to 21 per cent, Zip plunged 36 per cent, and Sezzle sunk 43 per cent.
The big banks won’t deliver the growth or volatility of their new-wave competitors, but investment specialists say they remain good long-term assets for people patient enough to ride out the pandemic.
MidSec managing partner Nick Loxton says big banks are still worth owning “but I wouldn’t expect they’re going to rebound in a hurry”.
“While interest rates are low it’s harder for them to make money,” he said.
Mr Loxton said he preferred the big banks over buy now, pay later stocks that were not earning profits.
“I know it sounds boring, but I like the idea of owning something that actually makes money,” he said.
“We are not aggressive buyers of the banks but we are happy to have some in our portfolio.”
Switzer Asset Management chairman Peter Switzer said big bank shares were a good long-term investment “but not as great as they have been”.
“Being a part of the Government’s rescue program has hurt their bottom lines and new rivals are eating some of their lunch,” Mr Switzer said.
“For the next two years, the dividends will be squeezed, though they will improve, but as soon as the reopening of the economy is in full swing and some kind of normalcy looks likely, bank share prices will trend higher,” he said.
Mr Switzer said investors were likely to see 20 per cent share price rises for ANZ, NAB and Westpac in the next two years, and 10 per cent for CBA, which had not fallen as far.
He said Afterpay and Zip were likely to remain good performers but their share prices would be volatile and they would face increasing competition from banks and US payment giant PayPal’s push into the buy now, pay later space.
Baker Young Stockbrokers managed portfolio analyst Toby Grimm said COVID’s drain on bank profits would subside and their dividends – which had been scrapped or slashed this year – would rebound but remain 30 to 40 per cent below previous years’ levels.
“We still view them as core investment holding,” he said.
“The underperformance of their shares brings them back to a reasonable value, but I wouldn’t say they are screamingly cheap.”
“They have shown they can adapt to new scenarios and modify their businesses to achieve profitability over the long term.”
Mr Grimm said Afterpay, Zip and other fintech stocks were high-risk, but if their current weakness continued they could become attractive buying opportunities.