House price boost a win for bank stocks

Although the national house price moves look to have outrun its fundamentals, the associated boost in economic activity will improve the outlook for bank credit growth and earnings, according to Martin Currie Australia.

Matthew Davison, Martin Currie Australia senior research analyst, said over-zealous provisions had further to be released as the broader economic buoyancy flowed through to an improved outlook for bad debts and further earnings momentum.

“The outlook for consensus bad debts assumes much of this provision build is still utilised into 2022,” Davison said.

“We think the evidence is to the contrary, and as a result we should continue to see positive earnings momentum as the market improves their forward-looking bad debt forecasts for the banking sector.”

Australian house prices had risen to record levels, in large part due to the COVID-19 pandemic economic response which saw a cut to interest rates to near zero levels.

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“Overall, in our value equity strategy, we are favouring on overweight position to banks, with higher active weights in ANZ Bank and NAB, a neutral position in Westpac, and an underweight in Commonwealth Bank (albeit we materially reduced this earlier in the year), due to the potential for valuations to better reflect bad debt unwinding, capital returns and improved credit growth,” Davison said.

“From our equity income strategy, which focusses on sustainable dividends, we like the dividend opportunities from all banks, but we see Westpac’s dividend having a slower dividend recovery than its peers.”