Banks still not so safe
With reporting season underway, we can see how the aftermath of the royal commission is still working its way through the financial services sector.
In its half year results, NAB reported revenue growth at just 1.4% while expenses were up 1.7%. Its earnings included $525 million in customer-related remediation costs, which resulted in the interim dividend being cut by 16% from 99 cents down to 83 cents per share.
ANZ reported a 2% increase in cash profit and held its interim dividend at $0.80 cents per share. Westpac is due to report on Monday but has already advised the market of an additional $260 million in remediation costs, adding to a total profit downgrade of more than $750 million.
Based on this you would think we should continue to stay clear of the banks, but as Mr Buffett says ‘buy in doom and sell in boom’. While the banks have been falling since early 2015, they have been trading up this calendar year with ANZ performing the best up over 11%, followed by Westpac up nearly 10%, NAB up around 7% and CBA 3.5%.
So am I bullish on the banks? I am getting really close, as I think these stocks will do well in the second half of this year and over the coming years.
This week AMP also reported a $1.8 billion net outflow in its cash flow update for the first quarter. While its shares are down over 8% this year, I believe it is starting to turn, so we may see a different story in the second half of the year.
With the RBA set to meet next week it’s highly likely we could see an interest rate cut. Prior to our last federal election, the RBA cut rates on the basis of global growth figures and lower inflation levels. Interestingly, this is quite similar to the situation we currently face with inflation at lower than expected levels and strong performance in the global markets. That said, with a fragile housing market and fair bit of political uncertainty, I believe it would be wise for the RBA to hold interest rates right now but only time will tell.
Leading the way in the top 200 stocks is Afterpay Touch up 13%, Bravura up nearly 9% and Nine Holdings up over 8%. This week the worst performers have been Pendal Group down nearly 12%, Domain Holdings down 10% and Super Retail down nearly 9%.
So what do we expect in the market?
The Australian market has traded down this week and I expect to see this continue for another one to two weeks before it returns to being bullish over the medium to longer term. Right now, my expectation is for the market to rise over the next one or two months before falling into a low sometime in July.
I also expect the All Ordinaries Index will finally break through its previous all-time high this year that occurred on 1 November 2007 at 6,873 points.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au
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