UBS’ Jonathan Mott weighs in on bank underperformance

Major banks stocks showed significant gains on Wednesday. Picture: AAP

The extraordinary rally in major-bank share prices on Wednesday is the outcome of several factors, most notably a long-time “bear” pointing to the sector’s persistent share price underperformance compared to the rest of the market, despite recent economic data that’s been better than expected.

UBS analyst Jon Mott hasn’t fundamentally changed his view that the big four face big challenges from September, when about $100bn in policy support winds down.

In the short-term, though, the majors had missed out on a big upswing in the broader market, underperforming by 19 per cent over the last three months.

That’s despite a period of unexpectedly good news, most recently the $60bn “saved” from JobKeeper outlays.

UBS banking analyst Jonathan Mott. Picture: Supplied

On top of that, household cashflow has been boosted by $10.6bn in early superannuation withdrawals, card and retail spending has been recovering, many small-cap companies have reported strong trading updates, and auction clearance rates have recovered.

A brief period of economic sunshine has replaced the country’s dire predicament of only a few weeks ago, with the pandemic so far showing no signs of a second wave.

“While we are certainly not out of the woods, the likelihood of a more severe downturn with even larger credit losses … driving dilutive capital raisings appears less likely in our view,” Mott said in his note.

For many years, the major-bank stocks traded at a surplus to book value, in a tribute to the strength of their franchises.

The premium has evaporated as the pandemic raised expectations of a wave of bad debts, with Westpac and ANZ Bank now trading at about 0.8 times book value.

The thinking in some sections of the market is that a 10 per cent return on equity would justify a return to book value, or a 25 per cent rally in share prices.