Are Australian Banks ‘Safe Havens’?
Writer CNBC.com Asia
First it was the Aussie dollar, now it is Australian banks that are being viewed as safe havens among global financial stocks, as their Western counterparts face more regulatory scrutiny, say analysts.
United Kingdom’s Standard Chartered is the latest to be accused of violating U.S. anti-money laundering laws, while earlier HSBC was accused by a U.S. Senate investigation of failing to prevent money laundering at its Mexican subsidiary.
South Korea also said Thursday that it would be investigating the local units of these two banks over these allegations.
However, these regulatory "tail risks" do not affect Australian banks, which are extremely well run, according to Brian Johnson, Banking Analyst with CLSA in Sydney.
“If you look at the tail risks emerging for banks globally, there has been a lot of calls coming in the last few days with people trying to get their heads around, do Australian banks have these massive tail risks that we have seen for HSBC and Standard Chartered? Given that they probably don’t, I would say that more of them would start thinking the Aussie banks as a banking safe haven,” Johnson told CNBC Asia’s "Squawk Box" on Friday.
At the same time, Australian banks are well-capitalized and non-performing loans are very low at about 1.75 percent of total lending, compared to 5-6 percent in the U.S. and Europe, according to Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital in Sydney.
“Relative to European and U.S. banks, Australian banks are certainly a safe haven,” Oliver told CNBC. “They have a return on equity of around 15 percent compared to around half that for U.S. banks and near zero for European banks. This reflects a combination of a stronger regulatory environment over the past decade, stronger property prices, and more conservative lending practices.”
They will also be able to withstand sharp falls in property prices in Australia despite their exposure to the housing sector there, he added.
8 Percent Dividend
Australian banks are also a great buy because of their valuations and high dividends, according to both analysts. The only bank stocks that are cheaper than Aussie ones are European lenders, Oliver said.
“Given their better fundamentals, including around 8 percent dividend yields, they are still a great buy though, particularly when allowance is made for the greater risk hanging over Europe and hence European banks,” Oliver said.
Australian bank stocks are trading at an average of about 11-12 times forward earnings, compared to high single-digits for certain European lenders.
Vasu Menon, Vice President of Wealth Management at OCBC Bank in Singapore, says overall Australian stocks remain attractive because of the high dividends companies regularly pay out.
“Australia is clearly a market that stands out in the OECD. The economy is doing well and clearly the latest economic projections out of the country are quite positive so I think Australia will still be on the radar screens of a lot of international investors,” he told CNBC.
CLSA’s Johnson says investors should look at National Australia Bank for which he has a 12-month price target of A$27.83 ($29.44), representing an upside of 10.3 percent from current levels. He has an ‘outperform’ rating on Australia and New Zealand BankingGroup (ANZ).
Some economists, however, do warn of a credit bubble building in Australia given the high levels of debt among households and companies. A lot of this debt is backed by property which is showing signs of weakness after a decade-long gain.
At the same time, a hard landing in China which is Australia's largest trading partner could derail Australia's growth and prick the credit bubble, say some experts.
- By CNBC's Jean Chua.