The Aussie Banks Move into ‘Buy Zone’

The Aussie Banks Move into ‘Buy Zone’

Forget the Royal Commission…

Provided investors are happy to hold for the long term, Aussie banks present a good buying opportunity in my view.

Here’s why…

Big money and major players are stepping into the markets.

Take a look at what’s going on in the UK.

The Financial Times reports that a group of investors led by Barclays, a major British bank, is going to buy a £5.3 billion portfolio of mortgages.

The seller is UK Asset Resolution (UKAR), a financial services holding company.

What’s going on here?

The British government set up UKAR after the financial crisis in 2008. It then lent it £48.7 billion so it could buy up the distressed mortgage books of two UK lenders.

One of those lenders was Northern Rock. It had the dubious distinction of becoming the first UK lender in 150 years to experience a bank run.

It’s history now, but the loans are still out there. And they’re now going to a new home.

Barclays and its fellow investors are going to securitise these mortgages.
In other words, they’ll buy the mortgages from UKAR and sell them on to other investors.

Presumably there’s a juicy spread in here somewhere…

In any case, most likely, UKAR is selling off the loans cheap to get rid of them. This sale means that UKAR can repay the last of the debt it owes to the British Treasury.

I find this deal notable for two major reasons…

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Goodbye, and (no) thanks for the memories

For one, the deal shows that the final dregs of 2008 are slowly disappearing.

Soon there will be nothing left but memories. The ‘bad bank’ for Ireland (similar to UKAR), for example, now needs something else to do because its original brief is finished.

The second reason is more pertinent right now.

The investors buying these loans don’t seem to be concerned about the recent spike in Libor rates — the rate at which banks offer to lend funds to one another in the international interbank market.

You might not be familiar with this, but a concern filtering around the markets lately is that short-term interest rates are rising outside of official central bank hikes.

The same thing happened before the 2008 collapse, raising fears that something big — such as another credit crisis — might be around the corner.

That’s always a possibility. But I don’t believe it’s likely.

Globally, bank shares are holding up, and there’s no blowout in costs to insure against default. All told, there are no signs of panic.

Short-term rates are most likely rising from US President Donald Trump’s recent tax repatriation deal for US companies with overseas cash, as well as the US government’s even bigger federal deficits.

The fact that Barclays and peers are happy to load up on mortgages right now is a clue that they’re thinking along the same lines.

Now, admittedly, they won’t be holding these loans for long. But they’re not the kinds of assets you want to get left with if we are actually on the brink of another credit collapse.

So this is partly why I’m comfortable being in the market in a ‘big picture’ sense.

Another reason is the cracking results US companies are reporting at the moment. They’re showing the strongest profit growth in seven years.

And that brings me to the Aussie market…

This sector moves into the ‘buy zone’

Aussie bank results are due over the next few weeks.

These shares have had a tough time lately. It’s one reason the ASX 200 is somewhat down on where I thought it would be by now.

The Royal Commission is unveiling some ugly truths about the banks and giving cause for concern on the implications of the revelations.

But at some point — most likely now — this gets built into the price.

The major banks are now trading on yields that range from 8.4–9.7%. That has to be tempting to a lot of buyers in the market with cash available. What’s more, there’s still a window of time to become eligible for dividend payouts before they go ex-dividend.

My expectation is for plenty of strong buying to come in here.

Most brokers have buy recommendations on banks. What’s more, self-managed super funds have a lot of capital to allocate. They’re comfortable holding the banks, and usually need income.

Investors buying the banks now take the risk that earnings results are going to come in line with — or better — expectations.

If that doesn’t turn out to be the case, they’ll take a hit. Those are risks.

That said, buying the banks now looks like a reasonable investment to me, especially for investors that plan on holding the foreseeable future.

Regards,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia