While national house price moves look to have outrun their fundamentals, the associated boost in economic activity will improve the outlook for bank credit growth and earnings.
The Announcement:
Australian house prices have risen to record levels, with the near unprecedented acceleration triggered by, among other factors, the COVID-19 pandemic crisis response to cut interest rates to near zero levels.
In a recent research article, Matthew Davison, Senior Research Analyst for Martin Currie Australia, part of Franklin Templeton, discusses that while the national house price moves look to have outrun their fundamentals, the associated boost in economic activity will release over-zealous provisions and improve the outlook for bank credit growth and earnings.
He notes: “We believe that the over-zealous provisions have further to be released as the broader economic buoyancy flows through to an improved outlook for bad debts and further earnings momentum.
“The outlook for consensus bad debts assumes much of this provision build is still utilised into 2022.
“We think the evidence is to the contrary, and as a result we should continue to see positive earnings momentum as the market improves their forward-looking bad debt forecasts for the banking sector.
“Overall, in our Value Equity strategy, we are favouring on overweight position to banks, with higher active weights in ANZ Bank and NAB, a neutral position in Westpac, and an underweight in Commonwealth Bank (albeit we materially reduced this earlier in the year), due to the potential for valuations to better reflect bad debt unwinding, capital returns and improved credit growth.
“From our Equity Income strategy, which focusses on Sustainable Dividends, we like the dividend opportunities from all banks, but we see Westpac’s dividend having a slower dividend recovery than its peers,” he notes.
Please click here to read the detailed research article.
Source: Franklin Templeton
