A rebound in bank stocks now underpins an unexpected rally on the ASX, but any “recovery” in the financial sector has to be taken with a generous helping of caution, not to mention context.
For long-term bank shareholders this run-up in bank shares accumulating to around 14 per cent over the week is a measure of compensation rather than a cause for celebration.
First, for bank shareholders the bounce is relative - bank stocks have been “underperforming” since before the crash. In the past two months they have underperformed by nearly 20 per cent.
What is happening is a classic “rotation” - where traders are now looking at the parts of the market where nobody has been willing to go - bank stocks are the obvious target.
Second, the issues facing the banks are deeply challenging as a wave of insolvencies loom in travel, entertainment and retail.
What’s more, around half a million home mortgages have been deferred until later in the year.
ANZ boss Shayne Elliott takes comfort in the fact that half of these deferring borrowers have not suffered a drop in income.
Read that another way and you might ask the question: “How will these home loan borrowers respond if they actually do face a financial turn for the worse?”
On the ASX on Wednesday, we had the extraordinary sight of two banks - ANZ and Westpac - featuring among the top 10 movers - both banks lifted by around 8 to 9 per cent each.
A similar lift - of almost 8 per cent - graced National Australia Bank where the board has thanked retail shareholders for their “support” in the completion of its capital raising.
The bank closed the raising and expanded the retail component of the issue from $500m to $1.25bn.
Indeed the bank said “the strong interest required a scaling back”, which means that those 155,000 shareholders who put down on average $18,500 each for the new shares will not get all they asked for.
There is a range of issues around the ultimate fairness of the wider capital raising plan launched by the bank and the irony of seeking new money while paying a dividend at the same time.
In short, the bank made sure it got the money it needed first by going to institutional investors - even though 48 per cent of the register is “retail”.
There is also room to argue the bank did not get so much a strong response as a partial response from its vast shareholder base. It attracted a segment that was willing to speculate they might finally make some money from the raising which was priced at $14.15 - the stock is now $17.94.
But remember, NAB was $25 a year ago and $30 three years ago.
In reality, the bank only managed a one-in-four participation and that is hardly a win. The majority of the banks’s 615,000 shareholders stayed away.
Of course, investors should make all judgments looking at the future and not at the past, but retail investors have long memories.
Many of the bank’s shareholder army would have been in place in 2009 when NAB had another raising of $750m and $2.6bn was collected from retail shareholders, which then had to be “scaled back”.
NAB shareholders rushed to buy a bank that went on letting them down for a decade.
New NAB CEO Ross McEwan can’t be blamed for any of that context, but he will understand the caution.
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