Robust yields and strong ratings have contributed to Australian banks outperforming the local market this week, even as ratings agency Moody’s downgraded 15 of the big four’s largest global peers.
Over the past five sessions, the banking sector rose 1.2 per cent, compared with a 0.2 per cent drop in the benchmark S&P/ASX200 index. Even today, in the aftermath of the Moody's downgrades overseas, the local finance stocks outperformed the broader index, falling only 0.6 per cent, compared with a nearly 1 per cent drop on the benchmark index.
Among the big four, only ANZ closed flat for the week. National Australia Bank rose by 4.75 per cent, while Westpac increased by 2 per cent, and CBA firmed by 1.6 per cent.
‘‘The reason the banks are so attractive at the moment is their yield,’’ said Matt Sherwood head of investment market research at Perpetual Investments. “There appears to be below-market average earnings risk.’’
Australian banks’ dividend yields are in the area of 6-7 per cent, which can be as high as 10 per cent fully franked.
The big four have also maintained their AA-ratings with stable outlooks from the credit ratings agencies, even as global giants such as JPMorgan and Morgan Stanley were downgraded by Moody's overnight.
Moody’s in its ratings review said the long term prospects for banks' profitability and growth were shrinking, and said it was especially concerned about banks with significant financial markets businesses.
Despite not being hit by the downgrades, Westpac has made contingency plans in case wholesale funding markets dry up due to global jitters.
Westpac chief executive Gail Kelly said the situation in Europe was concerning, but it wasn’t a surprise.
‘‘We planned for greater downgrades, we planned for continued volatility, we planned for, at various times, markets simply being unavailable,’’ Ms Kelly said today. ‘‘That’s why all the good, hard work we’ve done over the past three or four years is standing us in such good stead now with very high levels of liquidity, which really give us an enormous sense of buffer as well as a very strong retail deposit activity which is well more than covering the lending growth here.’’
Australian banks are also less reliant on overseas fund markets due to soft loan demand and higher levels of local savings.
‘‘We are meeting (loan) demand, it’s simply that demand isn’t there because of the caution that exists at the moment,’’ she said. ‘‘We can stand back and watch the activities in Europe and don’t need to participate in funding activities there until we find the right window of opportunity.’’
The prices of credit default swaps, financial hedges used to protect against losses, have also eased for Australian banks, despite the worries overseas, giving more support for the local banking sector.
Expectations for more stimulus from central banks and the ‘‘relative comfort with Australian risk’’ has seen a reduction in major bank credit default swap spreads down to about 160 basis points from 200 basis points in early June said Commonwealth Bank analyst Ben Zucker.
“The recent decline in major bank CDS is encouraging despite ongoing concern for sovereign risk in Europe and its impact on offshore wholesale funding markets,” he said.