Will bank shares fall further?

In a low-growth environment, major banks provide an attractive, fully franked dividend yield trading at between 7.5% (CBA) and 9.5% (ANZ). The continued uncertainty of future regulatory capital requirements, dividend sustainability and concerns of a weakening economy has seen bank shares trading at 20%-30% below their historical averages.

While major banks are likely to be required to increase their regulatory capital in the future, and the amount remains uncertain, the Australian Prudential Regulation Authority (APRA) has moved before other international regulatory bodies and banks have already been building regulatory capital. It is likely that most of the meaningful capital increases have occurred and further increases in regulatory capital will be over a reasonable time frame, which reduces the likelihood of any material capital raisings.

In addition, the major banks operate in a disciplined domestic oligopoly with 80% market share of residential mortgages. As a result, the major banks have been able to increase their standard variable interest rates on home loans three times already (with potentially more to come), partially offsetting the impact on return on equity and earnings per share from the increases in regulatory capital.

There are some concerns of a slowing domestic economy potentially feeding into higher bad and doubtful debts for banks but to date we have only really seen pockets of stress. More recently, APRA statistics suggest that mortgage growth remains robust and business credit growth is broadening to other parts of the economy beyond commercial developments. While bank dividend payout ratios may need to reduce overtime, this appears to be more than factored into the share prices.

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