Are Australia’s Big 4 Banks Set to Rise?

According to the RBA’s September report on the Australian economy and financial markets, the profitability of Australia’s banks has been falling since the GFC. The research looks at the return on shareholder equity after tax and minority interests just prior to the 1987 stock market crash until now.

According to the RBA, Australia’s major banks peaked at 20 per cent profitability before falling away after the GFC to now be under 10 per cent, which is below the level prior to the 1987 crash. To put this into context, historically over the last 30 years, the bank’s profitability has floated a few percent above or below 15 per cent, which has underpinned the growth in the share price of the big 4 banks over this time.

Do the big 4 banks spell opportunity over the long term?

Following the GFC, Australia’s banks rose strongly until 2015 and during that time profitability stayed strong. However, changes to the industry, the royal commission into banking and new regulation has placed challenges on the industry, which has caused not only the share price of banks to fall but also their profitability.

Eventually things stop falling and start to rise and the big 4 banks have moved up since their COVID lows in March of last year with CBA leading the charge moving to a new all-time high. That said Westpac, NAB and ANZ are still well below their 2015 highs. So, does this spell opportunity for those looking for good long-term growth?

As the Australian economy opens up again and gets back to business as usual, I believe banking profits will start to rise. However, other Australian banks may not be so lucky as their profits have been eroding since the early 1990’s and have been below the big four since prior to the GFC. That said, contrary to the big four, their current profitability is slightly above where it was after the GFC, so it is worth keeping an eye on these stocks.

Over the long term, I believe there is good value in the Australian financial sector and our banks will get back to doing what they do best, which is to make money for their shareholders.

What were the best and worst performing sectors last week?

The best performing sectors included Energy up 3.42 percent followed by Information Technology up 2.17 per cent and Healthcare up 1.72 per cent. The worst performing sectors included Materials down 3.69 per cent followed by Utilities down 1.76 per cent and Consumer Staples down 1.36 per cent.

The best performers in the ASX/S&P top 100 stocks included Altium up 14.41 percent followed by

Woodside Petroleum up 9.55 per cent and WiseTech Global up 7.85 per cent. The worst performing stocks included Fortescue Metals down 16.42 per cent followed by AGL Energy down 9.66 per cent and Brambles down 9.25 per cent.

What's next for the Australian share market?

The Australian stock market moved up slightly early last week although it was far from convincing, rising just under 1 per cent before falling away on Friday to close the week in the red. This financial year the All Ordinaries Index is up around 1.5 per cent and it has been five weeks since it achieved its all-time high of 7,902. The calendar year to date figures look better with the All Ordinaries Index up 12.44 per cent and I don’t expect this return to improve much before the end of this year.

The way the Australian stock market is unfolding right now has not changed my opinion that the probability has swung towards the market being more bearish in the short term. If this is correct, I expect the next low to occur sometime in the next two to four weeks with the market likely to fall below 7,200 points. This is just normal market behaviour, so I don’t recommend investors panic and sell their stocks but rather get ready to buy in November, as there are many stocks presenting some good opportunities for growth into 2022.

For now, good luck and good trading.

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 the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.