Bank bonanza: Sharemarket rally hands a win to older investors

Investors with franked dividend bank stocks have won big time after brokers were caught out by the latest rally.

Bank stocks opened the year to a wall of worry around results but those fears never materialised. Picture: Luis Enrique Ascui

The army of bank stock investors have notched up a rare win against the big end of town as bank stocks shoot out the lights.

Meanwhile, the fund managers who listened to major stockbrokers have missed the rally.

Repeatedly criticised for holding onto bank stocks for their franked dividends, retail investors are now sitting on exceptional recent returns from the big four bank stocks.

Better still, the outlook for bank dividends has improved significantly.

Only 10 weeks ago, major brokers were telling investors to sell bank stocks.

Worse still, Commonwealth Bank, the outperformer in the current rally, was among the key “sell” (or underweight) recommendations from major brokers such as Citi and Morgan Stanley.

But instead, bank stocks roared ahead: Over the year to date, bank stocks are running more than four times faster than the wider market as the banking index moves up almost 10 per cent, against less than 2 per cent for the ASX 200.

The brokers must now either revise their estimates upwards or wait and see if stocks fall substantially to the levels they expected. The most likely scenario is a string of broker upgrades for bank stocks in the months ahead.

To see how much brokers missed the rally, you only have to look at what’s called “consensus targets”. ANZ, NAB and Westpac would have to fall by 15 per cent for prices to come down to current targets – in the case of CBA, the bank’s stock would need to drop by a whopping 24 per cent.

What happened? Bank stocks opened the year to a wall of worry around results. Analysts warned of tightening margins and cooler lending conditions. In particular there were worries about the housing market and a possible bad debt blowout.

Those fears never came to pass – bank results offered few red flags, while the housing market bounced back accompanied by a lift in new lending activity.

In turn, that meant the fundamental outlook for banks improved and the warnings on limitations around paying dividends were off target.

Not for the first time, long-term bank stock holders – especially older investors who are extremely reluctant to sell bank shares – have been rewarded.

In fact, the tide may be turning with some brokers already revising their estimates for the year ahead. Among those issuing upgrades is investment bank Jarden, where chief economist Carlos Cacho and analyst Jeff Cai suggest “the continued recovery in house prices is consistent with bank outperformance”.

Cai says growth in bank dividends is now more likely, adding: “Historically bank stocks do very well when central banks cut official rates.”

Even though he suggests some of this anticipated gain may already be priced into bank stocks today, bank stocks typically outperform by 20 per cent following the first RBA rate cut.

Moreover, it is clear that the bank stock prices could still have some way to go. CBA shareholders – especially anyone who bought them in the original float at $5.40 – are clearly the rally winners, with the stock recently hitting an all-time record of $121.54.

Yet some bank stocks – even with outperformance this year – have lots of room for recovery. NAB has still to break its all-time high price set in 2015 of $37.78.

All the same, bank stocks are not expensive. According to Jarden, “while valuations are elevated, we don’t think bank sector price-earnings ratios are extreme relative to the broader market”.

Jarden now says factors “remain supportive of bank performance in the year ahead”.

Originally published as Bank bonanza: Sharemarket rally hands a win to older investors