There were no real surprises from the big four Australian banks this reporting season, which was contrary to forecasts from financial analysts.
At the time of the banking royal commission final report, many expected that the clouds of doom and gloom would be lifted from the banks and that they would get back on track quickly, with their share price likely to rise.
Indeed, many investors jumped into the banks thinking they were cheap after falling for around three years.
My thoughts at the time was that a lot of work still needed to be done and until the dust had well and truly settled from the royal commission, the banks would not be a great investment.
The recent reporting season continues to confirm it is going to be a slow road to better times for the Big Four.
This is partly attributed to the royal commission and the publics distrust of the big four given what occurred but also because of the subdued lending in the property market by the banks.
History indicates that analysts often get financial forecasts wrong even in good times, so don’t bet on the banks on forecasts alone.
The simple reality is that forecasts are just that, and like weather forecast things they can change quickly.
Rather than relying on analyst forecasts and the full and half yearly reports, investors should look at the bigger picture as to whether the banks fit into their portfolio. I also suggest that investors look at the share price of the banks to ensure they are moving up, which we all know has not been the case over the last three plus years.
Investors can take comfort in knowing that there is a light at the end of the tunnel following the royal commission.
And while you may not feel any sympathy for these corporations, given what was revealed, most of us have exposure to bank shares through our superannuation, so their recovery is important to the wealth of all Australians.
The banks have been recovering slowly and as shares rise over the medium term they will naturally experience falls. The positive news right now is that all four major banks are trading above the last long term low, which occurred in the last quarter of 2018. Since then ANZ is up 20%, CBA 15%, NAB is also up around 15% and WBC is up 16%.
While this is positive, it is important to consider how much capital investors have lost following the highs in 2015. ANZ is still down by around 26% despite the recent recovery, while CBA is down by 14.5%, NAB by 39.5% and WBC needs to recover by approximately 32% just to get back to where it was in 2015.
It will be a couple of years before we see a greater level of reliability in the results for the Big Four banks, particularly if the property market remains subdued for the next twelve to 18 months.
Remember, however, that a significant portion of the banks revenue is generated from other business areas, which will assist in underpinning the shares.
I believe that the past three years or so of declines have been an important lesson for investors, who in the past believed you could not lose by buying and holding these stocks.
But there is a time to be in the banks and a time to put your money elsewhere. If you haven’t already sold, right now is not the time to make that decision.
Currently, we see banks as an opportunity in the second half of the year. Our preferred banks are currently CBA and Westpac. That said, banks will still face further headwinds as they recover.
In short, whilst there is upside potential for investors in the banks over the medium to long term, don’t expect them to be back at 2015 levels any time soon, and expect that we may still get a few surprises along the road.