NAB’s results signal that an exit from bank stocks might be misjudged

Big brokers say it’s time to quit bank stocks but everyday investors should put that call into context or risk serious damage to their investment.

New NAB chief executive Andrew Irvine. Picture: David Geraghty

If you are among the millions of investors who have bank stocks as the core of your investment portfolio, the recent call to sell not just one, but all Australian bank stocks must have been disturbing.

The sell-the-lot note from global broker Citi got loads of attention last month.

So it was very interesting to watch the first major bank result since that note was issued when NAB posted half-year results this week.

Yes, the Nab results were soft but they were better than expected.

What’s more, the sharemarket response on the day was sufficiently supportive to lift both NAB and all banks stocks across the board on the ASX.

It’s a strong sign that bank stocks may turn out to be a lot more resilient than global brokers expect.

It might also be noted that in the blink of an eye the narrative that rates were going to drop has been replaced with higher for longer.

In fact, further rate rises cannot be ruled out. This is a new tailwind for bank stocks.

There was a time when broker notes were not news. Indeed, sharemarket research notes were closely guarded secrets kept strictly for private clients.

Now they are news items. And like all news, the more extreme the position taken, the more likely the note will get widespread attention.

So when Citi – a very powerful New York-based broker – issued its extreme call on bank stocks it got disproportionate attention.

Unfortunately there was little context given to the publication of that call.

Because the immediate context was that the big end of town had missed the bank stock rally earlier this year.

This calendar year had kicked off with a string of warnings about bank stocks

And what happened? They went off on a tear with CBA hitting all-time records – it is still at a dizzy $115 – and NAB at $34.33 is sitting a price return close to 30 per cent over the last year.

You might think this bank stock rebound against all odd is a once off. Not really; it happens repeatedly. There was a more dramatic example in 2017

Back then, the fears for bank stocks were more dramatic than today – where the main concern is mortgage growth will remain modest. In 2017 there was fears of a bad debt blowout while capital raisings were also thought to be imminent. But the sky never fell in.

That is not to say bank stocks are outright winners. On a long-term basis, with the exception of CBA, they have been range trading for years.

But for most investors – especially older investors – banks stocks are paying 6 or 7 per cent once franking is taken into consideration even when the share price does nothing whatsoever over the year.

In fairness, the textbook logic applied by Citi is perfectly clear as the broker is most uncomfortable with bank stock valuations which, by any measure, are quite elevated.

But so are residential property prices and that does not mean they are going to drop.

In practical terms it is pie in the sky to imagine even a big fund manager would sell what can constitute up to 30 per cent of the ASX index.

As for the everyday investor who has perhaps $20,000 in bank stocks, the problem is that if you were to follow this recommendation the chances are you won’t see the headlines when the big brokers suggest investors begin to “accumulate” bank stocks once more. Those notes will not make the headlines.

Costs relating to trading shares – along with the related tax and fee complications – are of little consequence for a fund manager but often a poor move for the long-term investor. That’s especially the case if that investor has one eye on having their bank stocks roll over into tax-free retirement.

Of course NAB is just one bank and the results were only for six months.

But there are pointers here; revenue held up and business revenue held up very well indeed.

When a new boss takes over any organisation it is the easiest thing in the world to diss the previous regime and say this place needs a reset. Typically a new CEO might say “unfortunately, we are going to have to do a bunch of writedowns”.

Newly minted NAB chief executive Andrew Irvine did not do anything like that, which at the very least means that outgoing boss Ross McEwan really was as good as his reputation.

NAB, with a market cap of $106bn, is now the key contender against CBA which is in a league of its own with a market capitalisation of $192bn.

Net profits over the half year at NAB fell 12 per cent to $3.5bn as expected but the dividend actually lifted ever so slightly and is now sitting on a yield of 5 per cent before franking.

Looking ahead, if interest rates do go up the banks are at an advantage. On the other hand if they drop share prices will move higher as the domestic economy strengthens.

Or as Irvine himself put it: “We’ve all got to remember if rates don’t go down or if rates were to go up that’s because the economy is outperforming.”

I’ve said it before – banks stocks for the everyday investor are a very different proposition to the international fund manager.

I would not be betting against a government-guaranteed financial cartel and for long-term investors they offer a unique share investment.

James Kirby hosts the twice weekly Money Puzzle podcast.

Originally published as NAB’s results signal that an exit from bank stocks might be misjudged