Treasure Chest: Banks & Exuberance

Treasure Chest | Jan 17 2024

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts.

By Rudi Filapek-Vandyck

Whose Idea Is It?

Bank sector analysts at Citi and Morgan Stanley

The subject:

Australian banks

More info:

The global end-of-year rally that finished 2023 has been great for shares in Australian banks too.

The perfect illustration to back up that statement comes from shares in CommBank ((CBA)), the local sector leader, surging to a new all-time record high of $114 (intra-day) this week. The same observation also tells us that, contrary to shares in BHP Group, Rio Tinto and others, the banks have remained remarkably resilient thus far in January.

Stockbroking analysts are yet to resume their pre-Christmas research output, but already two major brokerages locally have informed their clientele it's probably best not to have too high expectations regarding the performance of bank shares in 2024.

It's about sector valuations, for sure, but more so about operational challenges and headwinds that have been largely ignored when money was flowing in because, you know, the sun was shining and everybody seemed optimistic and happy.

First up; banks are expected to see profits retreat in the year ahead, probably by some -5% on average, which means there won't be much potential to increase dividends. Leaving dividends stable will, all else remaining equal, lift the payout ratio. There's no scenario of grave economic recession baked into such forecasts.

Neither Citi nor Morgan Stanley are forecasting a deep recession, but both identify multiple headwinds and challenges that will keep a lid on how well banks can perform operationally this year. Both teams of banking sector analysts have started the fresh calendar year with a negative stance on the sector.

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