Australian Banks: Expensive Havens

Feature Stories | Jun 02 2025

Following Australian bank reporting season, is the risk for share prices now skewed to the downside?

-Bank core earnings weaker over the period
-Benign bad debts provide an offset
-Safe haven status ongoing
-Analysts cannot get past overvaluation

By Greg Peel

"Whatever the theory," noted Citi back in April, "the common thread is that buyers look price indiscriminate, in that they are more concerned with the exposure they are avoiding (ie USD, resources, China risk, tariff risk) than the price that they are paying for Australian banks."

Citi was referring to the period immediately following Trump's "Liberation Day" tariffs and the turmoil they created on Wall Street and around the world. Amidst all the selling, Australian bank shares became a safe haven, and offshore investors piled in.

Trump paused those tariffs for 90 days a week later, sparking relief and a rebound on Wall Street. China was not spared, however, with Trump ratcheting his tariff up to 145%, before dropping it back to 30% and claiming victory. A 50% tariff was then placed on the EU, then paused. Most recently, a US court has blocked the original Liberation Day tariffs and the US administration has filed an appeal.

Having overcome initial panic, Wall Street has since adopted the so-called TACO trade; Trump always chickens out. And doesn't Trump love that one. While uncertainty remains elevated, no longer does Wall Street fear the worst, and the pre-Liberation Day levels have been recovered and exceeded in the US stock market.

But not only has this not led to relieved investors moving back out of their safe haven Australian bank positions, bank share prices have done little more than continue to rise.

Why?

Australian banks collectively form the largest sector on the ASX200 by market cap. The next largest is resources. While the two sectors will occasionally move together, history reveals a common tendency to shift out of one amidst misfortune and into the other.

Long before Trump returned to office, China's economy was on the ropes and incremental stimulus measure were failing to register. As China is the largest consumer of Australian resource sector output, commodity prices suffered from China's downturn, and investors switched out of resources and into banks.

Wall Street might be chomping on TACOs through Trump's flip-flopping tariff policy moves, but there is little doubt uncertainty remains. A 10% tariff on everyone may end up being the ultimate result, providing relief for penguins, but the impact on global trade would not be insignificant.

In other words, no reason (yet) to sell out of safe haven bank positions.

Rising bank share prices also become self-fulfilling. As the market cap share of the ASX200 rises (now around 23%), index-tracking funds must adjust their portfolio allocations accordingly, buying more bank shares and selling something else, such as resources.

A typical super fund is index-tracking, and flows into super funds from employees continues for now to exceed withdrawals from retirees, hence more and more needs to be allocated to the stock market, and into the biggest sector in particular.

Finally, As Wilsons points out, there are a large number of long-term retail shareholders sitting on significant capital gains from their bank positions, who thus face significant capital gains tax implications if they sell.

So they don't.

While analysts continue to view the bank sector as "fundamentally overvalued", with Commonwealth Bank ((CBA)) the standout, they also acknowledge all of the above.

Indeed, all agree bank valuations are currently "stretched", "elevated", "exalted"; choose your own word.