Bank share prices have been falling, but analysts say you would be rash to take that as a sign to sell. After all, the prices of Australian shares across the board have been falling since late April.
- Subscribe to Money’s weekly newsletter, delivered to your inbox every Wednesday
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
The four big banks (and Telstra) are the most important shares for most superannuation investors.
Their large superannuation funds hold big weightings to these companies in their investment portfolios. And DIY super fund members are even more heavily exposed to the big banks than members of the large super funds.
They have been terrific investments.
They have delivered not only capital gains but great yields.
There is a feeling among some market watchers that the best for the banks may have passed, at least for the time being.
Big bank share prices have suffered over the past several weeks in what is starting to look like a mini-correction.
The Commonwealth Bank's share price has fallen from about $95 in mid-March to the low $80 range.
Westpac is trading in the low $30 range from about $40. NAB and ANZ have also fallen but not as much.
So what is the future likely to hold?
On balance, most analysts are fairly sanguine about bank prospects.
Peter Warnes, head of equities research at Morningstar, remains comfortable with the outlook for the banks.
"The biggest risk is clearly what is going to happen in housing," he says.
There no escaping that the banks' fortunes are largely tied to residential property and the broader health of the economy because of their massive mortgage books, he says.
"Having said that, the LVRs [loan to valuation ratios] of the big banks' residential lending portfolios are about 50 per cent, which is a lot of equity," he says.
"We do not see a disaster on the horizon; albeit, the risk is that the bad debt provisions will rise over the next few years."
Big Australian banks showed their resilience during the global financial crisis. Their share prices tumbled, along with the others, during the crisis.
And their dividends dropped by about 20 per cent. However, after a year or so, their dividends recovered. They have grown ever since.
However, profit growth has been slowing, and the banks will retain more of their profits rather than give more to shareholders through dividends.
The Australian economy is struggling. Unemployment may peak this cycle at just over 7 per cent, from the present 6.2 per cent.
However, it would probably take an unemployment rate of at least 9 per cent to spell trouble for house prices.
The property price boon is contained to Sydney. While there are many factors driving Sydney prices higher, the prime mover is record low interest rates.
Rates will eventually start rising but they may stay low for some time.
Big bank shares can be bought on "gross" dividend yields, after including franking credits, of 7 per cent or more. That is very attractive for investors, given term deposits pay about 2.5 per cent.
The big four continue to dominate the banking sector by virtue of an economic moat that competitors are unable to breach.
