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From Credit Suisse: We are cautious on banks because of corporate asset quality concerns. However, we see reasons to be positive on banks. Notably, banks tend to outperform in a falling inflation/interest rate environment. Also, we believe that banks are quite cheap, even after accounting for prevailing growth risks. Deleveraging is a medium-term growth risk for the Australian economy. The economy is highly dependent on the commodity price inflation and foreign capital for growth. Indeed, both factors have underpinned the sharp rise in house prices recent years. However, in a bearish scenario, commodity prices fall, and foreign funding dries up, triggering sharp house price correction. This scenario is negative for both banks and resources. But would banks underperform? To answer this question, we construct long-run models of banking sector relative performance using house prices and liquidity. Our models establish statistically meaningful and stable one-for-one relationships between banking sector performance and house prices/liquidity. Moreover, they can be used to generate significant alpha in real time since the 1960s, with an information ratio of 0.5. Based on our models, banks are still likely to outperform in a bearish growth scenario because they are already priced for a hard landing. Australian house prices could potentially fall by 25-30% - but banks are currently trading at a 25-30% discount to house prices/liquidity. |
