With banks on the nose now is the time to buy

Westpac’s CEO was handed the equivalent of a public flogging today but, for all the shaming, banks are now cheap.

Westpac managing director Brian Hartzer looks on as chairman Lindsay Maxsted at today’s AGM in Perth. Picture: AAP

“The time to buy”, said Baron Rotschild, “is when blood is running in the streets”, or perhaps, to relocate the maxim, when bank stocks yielding 7 per cent are so utterly out of favour they are getting historic votes against their remuneration reports.

Even at the worst moments over the last year when it was clear our big four banks were ridden with scandal and facing a raft of new regulation, it never looked this bad. Westpac CEO Brian Hartzer — a top global banking executive — has endured the corporate equivalent of a public caning at the bank’s AGM.

But remuneration votes — in common with royal commissions — do not lack an element of theatre, meanwhile the issue for investors is simple … at these levels are bank stocks cheap?

The short answer is yes.

For most shareholders it will be hard to even consider buying bank stocks now because they have already lost more money than most. Westpac’s 20 per cent swoon this year has been matched by NAB. (The other two majors, ANZ and CBA are down about 14 per cent).

Besides, the outlook remains tough, the scandals have not yet been put to bed and we do not know what the final Hayne report will bring on February 1.

But here’s the thing, if you look at bank stocks afresh on the numbers presented today they are exceptional — Westpac, for example, is offering a dividend yield of 7.3 per cent with a price earnings ratio of around 11 times and though the sector is in difficult straits two things jump out — the bank could still grow revenue and manage costs in these conditions.

To put it another way, if the outlook was no worse than we know it to be — bank stocks have rarely been so well priced. It’s a point being promoted by a lengthening line of brokers including the global broker Citi and by veteran banking analyst Brett Le Mesurier at Shaws who has a ‘buy’ call on each of the big four.

Many industry analysts have a simple theory: The banks are doing badly, indeed they may continue to do so, but through sheer scale and position they will pay their way in the year ahead.

What might go wrong? A full blown recession, a housing collapse …. utter mayhem in Canberra, any of these factors could keep all share prices lower for longer and may threaten dividend-paying capacity at the banks.

But in the more likely scenario of a subdued and flat market in the next year then bank stocks will have to fall perhaps another ten per cent from here to wipe out the uplift promised by those dividends. Additionally, dividend payout ratios are dropping to more sustainable levels. Westpac’s is at 81 per cent (remember NAB hit 94 per cent as recently as September). For share investors this is buffer which is not on display elsewhere — widely favoured growth stocks offer tiny dividends, take CSL for example.

Housing conditions and related credit growth is the outstanding issue for bank stocks rather than regulation costs or for that matter record-breaking remuneration strikes. No surprise then the brokers favour banks which have less exposure to housing and more to business — the favourites just now are in the following order — NAB, ANZ, Wespac and CBA.

Keep in mind too that those dividend yields at the banks are before franking — the argument for them stands even if the ALP wins the next election and goes ahead with its plan to scrap cash rebates for retirees on franked dividends.

The banks are cheap — that is not quite the same thing as good value — but on every classic measure they offer a defensive choice which could buoy new share investors in the months ahead — and that is a value in itself.