Have The Banks Been Oversold?

Sydney Morning Herald

Wednesday January 16, 2008

Martin Roth

Troubles in the US subprime market have rippled through to Australia. The biggest local casualty has been the shopping centre investor Centro Properties Group, which has been struggling to refinance its debts. However, even our banks have suffered, their shares discarded by nervous investors who wonder if they might become the next casualties.

But has the sell-off gone too far?

Some market analysts believe it has and that the local banking sector is now looking attractive to buy.

"We are pretty bullish for the sector," says James Holt, senior investment specialist for Zurich Financial Services Australia. "The contrast between the US and Australia is quite stark. In Australia we have already been through a bit of a housing downturn. It started four years ago on the eastern seaboard. The banks handled it well. They have learned the lessons of the early 1990s."

He notes that 60 to 70 per cent of the American economy is consumer driven and that "in the last five years about half of US consumption was effectively based on borrowing against the house. So if house prices are not going up and home owners cannot refinance their loans, that takes a major driver of economic growth out of the equation, which is negative for American banks as well as for the US economy."

By contrast, he says, the Australian economy is less dependent on consumer spending because of factors such as the strength of our resources sector.

"So our banks still maintain a lot of non-consumer lending," he says. "Also, they are all involved in wealth management, which provides them with strong growth. This business is expanding at 20 to 30 per cent a year. Right now the only bad news for the banks is that the global cost of credit has risen."

According to David Spry, research manager at stockbrokers F.W. Holst, "There is investor negativity towards the banks. But yields are getting reasonable and they will hold their earnings this year."

Shane Oliver, head of investment strategy and chief economist with AMP Capital Investors, agrees.

"The trouble Australian banks have is that every time the US banks fall over, ours also seem to get hit out of sympathy.

"They are unfairly tainted. Investors are acting in knee-jerk fashion.

"In fact, recently the valuations of our local banks have improved in an absolute sense, given the market softness we have seen.

"The business sector is robust. Housing finance is still strong, even if it is not as good as a few years ago. The level of defaults remains low. It may be rising but this is from a low base. There is a reasonable outlook for credit generally," he says.

Oliver also notes that recent turmoil in overseas financial markets has helped the banks gain market share.

"In the last six months the banks' share of new mortgages has risen from 75 to 85 per cent," he says.

"This trend will likely continue. Non-bank lenders are losing market share.

"When credit markets go through a crunch, it takes a while for investors to put money back into mortgage-backed securities."

© 2008 Sydney Morning Herald

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