Volatile week results in huge gains for bank stocks

A week of massive volatility in Australian banks has left the sector with huge gains after bullish reports from analysts.

Westpac shares rose 15 per cent this week, their biggest weekly gain. Picture: Stuart McEvoy

A week of massive volatility in Australian banks has left the sector with huge gains after bullish reports from analysts triggered a wave of bargain-hunting from value-hungry investors.

Even after falling 4.5 per cent on Friday, the S&P/ASX 200 Banks index rose 13 per cent for the week. Three of the four majors recorded their biggest weekly share price gains on record.

However, on Friday Westpac dived 6.4 per cent to $17.22 a share, NAB fell 5.2 per cent to $17.81, ANZ lost 4.5 per cent to $17.89 and Commonwealth Bank fell 3 per cent to $63.75 as Macquarie’s Victor German said the residual value in the sector was “no longer large enough to chase the banks from here”.

Portfolio rebalancing also hit the market in the closing match, magnifying the pullback in banks. The overall market had surged relative to bonds this month, leading balanced funds to sell.

But that didn’t stop the banks recording huge gains for the week.

Westpac added 15 per cent, ANZ rose 18 per cent and NAB added 16 per cent this week — their biggest weekly gains ever — while CBA rose 8.6 per cent, its best week since 2011.

Banks have underperformed the broader sharemarket for about three years. Since the peak of the housing boom in 2017, the sector had lost half its value by March this year.

The downturn was exacerbated by customer remediation provisions following the banking royal commission in 2018 and a money-laundering probe of Westpac. And banks sharply underperformed in the COVID-19 pandemic as regulators pushed them to cut dividends and raise capital.

But in a report to clients on Tuesday, UBS analyst Jonathan Mott — a long-time bear on the sector — said he was “more optimistic on the banks in the near term” amid a string of positive news for the economy.

Authorities have revised down the number of JobKeeper wage subsidy recipients to 3.5 million, from 6.5 million, $10.6bn has been withdrawn from superannuation (helping consumer cash flows), and credit card spend and retail data have started recovering, along with home auction clearance rates.

“This is all good news and, with the healthcare outcomes continuing to improve, the outlook for the economy is on the rise,” Mr Mott said. “While we are certainly not out of the woods, the likelihood of a more severe downturn with even larger credit losses and CRWA (capital to risk-weighted assets ratio) pro-cyclicality driving dilutive capital raisings appears less likely in our view.”

Not to be outdone, JPMorgan’s Andrew Triggs said banks valuations “remain cheap” and an impressive rise this week was “long overdue”, with banks having underperformed by 19 per cent from the peak of sharemarket in February until the rebound in banks started this week.

“We see cause for optimism that more dire forecasts on economic activity may have overstated the risks, with restrictions easing across the country,” Mr Triggs said in report.