Retail banking profit margins will struggle as a reduction in interest rates, results in lower profits, due to lower net interest income.
This week the Reserve Bank warned that banks face fresh risks of business insolvencies and tighter margins from record low interest rates.
“The resilience of the banking system up to now doesn’t mean that risks have passed,” Mr Kearns said.
“We’ve had the largest contraction in global output since the Great Depression. And as that impairs some households’ and businesses’ ability to repay their loans, the liquidity phase of the crisis is giving way to a solvency phase.”
US banks report earnings tonight and we’ll analyze the breakdown in profits from investment activities versus retail banking. This will be a key determinant in global fund managers deciding to sell into this result or hold existing long exposure within the sector.
A reference point to consider will be tracking the ASX listed MVB ETF. The suggested approach is to stay long the sector but re-evaluate, should we see the price action trade below the 10-day average.
Further updates will be provided following tonight’s US bank results.
Shares of the “big-4” banks are trading sharply lower as the Government announced a $75 million Banking Royal Commission before the ASX open today.
When making the announcement, PM Turnbull said it was a regrettable but necessary action.
The terms of the inquiry are wider than the market expected and will include the entire financial services sector. The final report will be due in February 2019.
We have been giving the banks a wide berth recently due to likely headwinds from slower loan growth and falling profit guidance. We’ll continue to watch the ALGO engine for trade updates and future levels to enter the market.
On the 30th of May we looked at the MVB Veneck Vectors Banking ETF and identified the 50% retracement target to be $26.00. Yesterday, the MVB traded at a low of $26.56.
The 50% retracement of the prior peak -to-trough does not guarantee price support. However, more often than not, buyers will step back in at or near this point.
The conundrum facing local ASX investors is the dislocation between US equities and Australian equities. As such, “buy on the dip” domestic investors will need to remain cautious of the extended US equity valuations.
We’ve been net sellers of the banks and we continue to remain cautious. The probability of discounted rights issues, increasing bad debts, reduction of dividends and little or no revenue growth, hardly makes for a compelling investment case.
However, the chance of the washout being completed in one continued move lower, is low. Normally, we’d expect to see value investors step in at some point and create a more structured decline, with reasonable rallies within the broader downtrend.
With the above in mind, I’ve looked at the MVB Bank ETF and based on a 50% retracement, we’re now within 5% of the likely support area. Any bounce will be moderate and investors should again look to sell the rally.
Our Algo Engine will continue tracking the entry signals.
Since the beginning of May, shares of the “Big 5” banking stocks have dropped between 8 to 10%.
We expect to see a bounce of some degree in the near-term, but it’s difficult to predict which name will see the most significant rebound.
For investors looking to take a step back into the long side of the banking sector, we suggest the Vaneck banking EFT with the symbol: MVB
This Exchange traded fund has dropped from $30.00 on April 27th the current price of $27.30. We believe a small allocation at these levels, for a bounce back to $28.75 would represent a solid “tactical” trade.
BEN will report 1H17 earnings on Monday the 13th. We’re expecting 1 – 4% growth on the same time last year. Full FY17 forecast profit should be around $450m.
In general, across the bank names we expect margins and credit quality to be the key areas of focus at the upcoming results. Benign credit growth conditions underpinned by slowing housing credit & flat growth in business lending.
Highly leveraged household balance sheets and ongoing pressure from the regulator to improve the quality of housing lending, should restrict the growth outlook into FY18.