You can still bank on banks, and NAB’s the standout

The ‘‘also-ran’’ of the sector now has ‘‘first mover’’ advantage in a new era for Australian banking.

With the stroke of a pen this week Andrew Thorburn, the newly minted chief executive at NAB, has broken the mould for our ‘‘big four’’ bank stocks — the single most important sector of the stockmarket.

For much too long our four banks — ANZ, CBA, NAB and Westpac — have been frozen in a lucrative torpor as investors drifted towards high dividends and the comfort of an implicit government guarantee of a bailout should things go wrong.

This week’s sharp sell-off in bank stocks suggests that era might be coming to an end. Shareholders are going to become a lot more selective as things get tougher for banks.

NAB’s new team, led by Thorburn and new chairman Ken Henry, have now grabbed first mover advantage with their audacious plan to re-energise the bank through quitting the long-troubled British subsidiaries.

Moreover, the sheer gusto of a $5.5 billion raising has to be admired — the bank gets first bite at the wall of shareholder cash that has been waiting in the wings.

NAB’s 500,000 private shareholders will regard this rights issue, with its 20 per cent discount (indeed, a 30 per cent discount compared to the share price only a few weeks ago), as an opportunity to top up.

NAB is strongly financed and rid of the Clydesdale and Yorkshire offshoots in Britain, and Thorburn has the chance to remake it as a major aggressive player in a market at the right time, that is, just when shareholders want to see a ‘‘growth catalyst’’ along with a handsome dividend in any bank stock.

Yes, there has been a sell-off in bank stocks and that was always going to happen when the bond market showed any sign of a change in direction. Now with treasury yields in the US, Europe and Australia finally lifting, this is upon us. But calls to ‘‘sell banks’’ or indeed hysterical claims that bank dividends might not matter if the bank stock prices keep falling are just noise.

After the share price falls of recent days every one of the major banks is back again showing a dividend yield of 5 per cent or more — that’s nearly 7 per cent when you roll in franking credits.

At the same time, cash rates have been cut, again making those franked dividends look very strong indeed.

Fund managers can move in and out of bank stocks if they wish, but I expect the vast majority of retail investors will do no such thing while the numbers remain the way they are.

Here’s a snapshot of the major bank stocks, enlightened by the mid-year reports released during the last week.

NAB

The bank announced its expensive — if welcome — exit from Britain just as it was getting things right at home.

The bank reported a very solid 5.4 per cent lift in cash profits on the previous corresponding ­period. Though margins were down — as they were at every major bank — the group’s cost-to-­income ratio went the right way — that is, it fell from 45 per cent to 44 per cent.

Looking ahead, NAB has a forward price/earnings ratio of 12.7 times with a dividend yield of 5.6 per cent.

ANZ

ANZ reported a 5 per cent lift in cash earnings to $3.7bn. The bank’s margins fell, but its cost to income ratio also fell a tad to 44.9 per cent — as a more complex bank than its peers, this is a win for ANZ.

NAB may now become the bank with the growth premium, but ANZ promised this factor in the early days of chief executive Mike Smith’s reign with dreams of becoming a player in Asia. Today, though, the proportion of revenue from Asia at 16 per cent is awfully slim.

As for the numbers private investors look at, ANZ is the standout with a P/E ratio the lowest of the big four at about 12.5 times and a dividend of 5.45 per cent.

Westpac

The key number at Westpac was an unchanged cash profit compared with the previous corresponding period of $3.8bn.

The key numbers went the wrong way — margins fell and the cost to income ratio went up to 42.5 per cent.

The eyebrow-raiser at Westpac — traditionally the most conservative of the major banks — is that 46 per cent of the mortgage book is investors, not home buyers. What’s more, many of those investors are interest-only.

According to the bank, such customers are no riskier than those who stump up a deposit. That might be what the numbers in the rear view mirror may be showing, but common sense would suggest that higher rates coupled with any upset in the trajectory of house prices could mean trouble in this area.

Westpac used the results to announce a $2bn capital raising.

All banks are facing higher capital ratio requirements at present.

For Westpac shareholders it’s back to the future, with the bank not just running a dividend reinvestment plan but a discounted plan.

Having said that, the discount at 1.8 per cent is wafer-thin.

On the numbers that are front of mind for private investors, Westpac is middle of the road with a 5.4 per cent yield and a P/E ratio of 14 times.

Commonwealth Bank

The champion of the banking sector (I mean this strictly from an investment point of view) runs on a different reporting cycle to the other three major banks and only reported quarterly numbers this week. The cash profit was unchanged at $2.2bn.

Quarterly results are simply not comparable with interim, except to say that in common with its peers, margin appeared to be going down and the cost to income ratio appeared to be going the wrong way.

CBA got hit hardest in the sell-off this week. There are obvious reasons for this sharp drop — CBA had the best run in recent months. Even after its shock drop mid-week — the biggest one-day drop it had since 2009, when it traded at $24! — the stock is still on a P/E ratio of 15.2 times and its yield has inched back above 5 per cent.

In summary, the banks are not as exquisitely set as they were, but all four are in a very strong position. All four pay 5 per cent or more dividend yield — and NAB has created the chance to be the standout stock in the months ahead.

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