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Are The Banks Cheap At Current Prices?

Everyone loves having a share of the Big 4 Banks – ANZ, CBA, NAB, WBC, and with recent price action, we’ve certainly been asked more often whether it’s time to accumulate more of them!

Now, our view on banks are mixed, and while we acknowledge that Aussie banks have done remarkably well and keep on delivering, the growth has slowed substantially and arguably there are further headwinds ahead.

So don’t be rushing to buy just yet!

We believe that the slowing housing market and possible rising interest rates will have a major impact on banks, and how the banks manage that will be key.

You might ask whether interest rates are really rising.

The RBA suggested the neutral rate for our official rates to be around 3.50%. That compares with our current 1.50%, a whopping 2.00% higher. Now this might sound great as you may well be earning more on your savings accounts and term deposits, but any mortgages you have – may well go up.

CBA’s “standard variable rate” is currently 5.36%, again compare it with the 1.50% official RBA rate now. If the interest rates rose, would the standard variable rate go up? And will the Banks hesitate to pass this cost along to you?

Now, the interest rates are not rising so far, and the RBA will unlikely raise interest in the short-term. However, we need to be prepared for it, and it might be something to keep in the back of your mind when considering putting money into the Big 4 Banks.

Your final question might be, if interest rates go up, won’t that mean the Banks will make more money?

Yes and no. It’s all about supply and demand here, and the question we propose to you is whether they will make more money (from the increased mortgage return) vs. the number of defaults (from people who are simply unable to pay). That’s hard to say and it’s best you formulate your own opinion, but here is ours.

The current benign economic conditions, and multi-year housing boom has provided our banks with a platform for massive out-performance. This cycle has lasted an unusually long time so all good things must come to an end – hence we are cautious.

At best, the Banks are a hold for us. For now, we will not be touching them!



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