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Speaker 1: Welcome to Fearing, Greek Q and A, where we ask

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Speaker 1: and answer questions about business, investing, economics, politics and more.

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Speaker 1: I'm Sean Almer. Is it time to reconsider exposure to

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Speaker 1: the Big four banks? If so, and if it's not

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Speaker 1: too late already, which stocks should investors be looking into?

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Speaker 1: This is general information only and you should always seek

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Speaker 1: professional advice tailored to your circumstances before making any investment decision.

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Speaker 1: Andrew Dale is a partner at ECP Asset Management. Andrew,

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Speaker 1: welcome to Fear and Greed.

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Speaker 2: Thank you for having me.

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Speaker 1: We love the banks, We have always loved the banks

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Speaker 1: and financials are you know, thirty thirty five percent of

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Speaker 1: the market entail and the big four lenders the big

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Speaker 1: chunk of that. Why is it about the banks that

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Speaker 1: we like so much? And why have they run so hard? Yeah?

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Speaker 2: Look, I mean, as you point out, banks are just

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Speaker 2: a big part of the market, so it's impossible to

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Speaker 2: ignore them. I guess the other category has been resources historically,

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Speaker 2: so the combined nature of both is simply makes them

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Speaker 2: unavoidable if you're going to invest in equities. Why do

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Speaker 2: we like them? I think really from a particularly from

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Speaker 2: a retail perspective, there's not a person in Australia that

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Speaker 2: has not heard of the banks, so CBA, Westpac, NAB

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Speaker 2: and A and Z. Everybody has a relationship probably with

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Speaker 2: one of them, maybe even two of them, and they

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Speaker 2: either go into branch use ATMs or they're very well

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Speaker 2: aware of the things that they provide. They have multiple products.

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Speaker 2: So it's always what I call a bit like a

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Speaker 2: household name stock, a stock that people know and understand,

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Speaker 2: and as a result, it's kind of easy to invest

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Speaker 2: in them. You know that they feel strong, they feel protected.

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Speaker 2: The GFC showed that they were amongst the strongest financials globally,

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Speaker 2: so as a result, not a difficult one for people

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Speaker 2: to get their heads around. And typically from a retail perspective,

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Speaker 2: they've been less worried about valuations. They've been more focused

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Speaker 2: on opportunity.

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Speaker 1: Okay, so I mean ten years ago when I was

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Speaker 1: a banking writer, or twenty years ago. I hate to

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Speaker 1: say it, but I'm going to pretend it was ten,

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Speaker 1: but it was actually twenty. The whole idea that you know,

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Speaker 1: a rising tide floats or boats, and so the thing

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Speaker 1: is how long as you got into an Australian Bank,

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Speaker 1: you'd be fine right now. That has certainly not played

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Speaker 1: out in the last three or four years or post

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Speaker 1: the Hayne Royal Commission with the banks. Commonwealth Bank has

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Speaker 1: definitely outperformed and relative to the other three it has

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Speaker 1: been much more expensive. Now we've seen that reversed somewhat

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Speaker 1: before a few things in that. Is there much difference

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Speaker 1: between the big four Australian banks As an investor, Yeah, look.

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Speaker 2: There really is, Sean, I mean that there's I think

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Speaker 2: CBA had that really amazing run, a performance really on

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Speaker 2: the back of what was a really simple story. You

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Speaker 2: know that historically there'd been things that you know, were

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Speaker 2: a bit hard to get your head around, but with

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Speaker 2: Matt Common coming into the business, he was able to

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Speaker 2: really streamline the offering and really focus on the existing

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Speaker 2: customer base, banking them more so. You know, I'm a customer,

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Speaker 2: I have a mortgage, Let's make sure I've got a

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Speaker 2: transaction account, Let's make sure I've got a personal line,

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Speaker 2: Let's make sure I've got you know, credit cards, etc.

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Speaker 2: Really focusing on simple banking, perhaps getting rid of a

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Speaker 2: bit of the offshore stuff, a bit of the other complexities,

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Speaker 2: and it made for a really good story, also combining

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Speaker 2: the fact that had the most customers, so it's got

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Speaker 2: the biggest retail share, the biggest retail deposit base, which

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Speaker 2: for those that don't know, the more deposits the better

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Speaker 2: margins generally because they're the cheapest source of funding. So

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Speaker 2: there was every reason for CBA, I think, to outperform.

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Speaker 2: Valuation was a problem anyway, so we can't look at

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Speaker 2: that and say, oh, it's overvalued. It has been for

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Speaker 2: five years on traditional metrics, So I kind of put

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Speaker 2: that to a side, and I think where is the quality.

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Speaker 2: That's the quality. If you look at the other banks,

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Speaker 2: they've all had separate stories. A and Z's much more

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Speaker 2: of an institutional bank that has offshore assets and more complexity.

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Speaker 2: It's had management related changes, It's had a whole bunch

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Speaker 2: things going on. It's kind of a specific story. It's

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Speaker 2: been more of a turnaround story and as a results

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Speaker 2: perform really well recently under new management. I think Westpac's

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Speaker 2: had a little bit of that. It's a bit of

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Speaker 2: a lower form of CBA in my view, like really

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Speaker 2: high quality retail bank. A lot of problems on the

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Speaker 2: back end in systems, and they've got a lot of

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Speaker 2: work to be done there, new managements come in, perhaps

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Speaker 2: there's a bit more of an excitement around turnaround, so

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Speaker 2: performed a bit better. And then you've got NAP, which

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Speaker 2: is specifically the biggest SME lender or business banking operations.

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Speaker 2: So if you want to get exposure to that segment

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Speaker 2: of the market, that's where you get it. So very

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Speaker 2: different exposures and as a result you seen different performances.

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Speaker 2: CBA has given up a lot of those sort of

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Speaker 2: gains that we saw perhaps over the past few years,

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Speaker 2: but still looking quite attractive, whereas the other stocks have

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Speaker 2: probably provided with investors with a little bit more sizzle

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Speaker 2: and a little bit more recovery stories, and I think

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Speaker 2: that's why they've outperformed.

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Speaker 1: Andrew, I love a sizzling bank if I'm getting to

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Speaker 1: put some money in, you know, I hasten to add

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Speaker 1: all listeners should actually go and seek financial a device

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Speaker 1: before making any investment decisions. But the way to think

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Speaker 1: about it should I be thinking about, Well, I like

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Speaker 1: the SME exposure, so that's where I'll go. I'm worried

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Speaker 1: about Westpac's back office legacy issues. That's what I should

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Speaker 1: worry about. Common off Bank. I mean it's hard not

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Speaker 1: to worry about valuations to some point. Which one I mean,

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Speaker 1: I'm almost asking which one I should be thinking most

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Speaker 1: about or which one I should be thinking least about.

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Speaker 2: Well, now you know what, Sean, I think I'd be

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Speaker 2: thinking differently. I'd be thinking where do I want exposures? Okay,

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Speaker 2: so let's forget like which one what do I want? Exposure?

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Speaker 1: Wise?

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Speaker 2: Now I think that you know, from a big four banks,

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Speaker 2: I like the I still will always like CBA from

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Speaker 2: a quality perspective. It's the highest quality of the banks

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Speaker 2: in my view, and as a result, it has a

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Speaker 2: position in your portfolio. If I want to get sm lending,

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Speaker 2: I can look at NAB. I'd probably go a little

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Speaker 2: bit a long way down the curve and think about

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Speaker 2: things like Judo Bank, not very well known by people,

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Speaker 2: smaller market cap sme lending only real relationship style banking,

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Speaker 2: which the big banks have sort of let go because

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Speaker 2: they can't do relationship banking if they want to get

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Speaker 2: high volumes, and as a result got much better growth,

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Speaker 2: better nims, better sort of return on equity profiles over

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Speaker 2: the medium term. So I think it looks interesting. So

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Speaker 2: I'm adding a little bit of that sort of bank

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Speaker 2: to the mix, and then if I want something a

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Speaker 2: little bit more different and a little bit more sort

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Speaker 2: of you know, I call it maybe spicy. But mcquari

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Speaker 2: bank you've got. You know, they're starting to wash out

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Speaker 2: some of those old earning peaks that they've had in

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Speaker 2: the past, whether they be commodity related or whether they

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Speaker 2: be related to some of the assets. Sales. Expectations for

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Speaker 2: that bank are starting to look more realistic on a

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Speaker 2: medium term basis, and it might just be a good

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Speaker 2: time to get a bit of exposure to something a

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Speaker 2: little bit different. So you've got CBA, Judo and McQuary.

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Speaker 2: I think with those banks right now, that's a really

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Speaker 2: good way to position yourself on a probably a medium

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Speaker 2: term view.

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Speaker 1: And that's diversification too, putting all your money with the

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Speaker 1: big four.

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Speaker 2: So I mean, look, hey, I wish I owned aane

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Speaker 2: Z and you know some of these other banks maybe

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Speaker 2: six months ago. But that ships sail and that's kind

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Speaker 2: of similar to the whole market. We're not going to

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Speaker 2: talk about the whole market right now, but that's similar

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Speaker 2: to the whole market. Things that were good up until

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Speaker 2: the past twelve months have kind of waned a bit.

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Speaker 2: But I think as we go into next year, they

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Speaker 2: are going to refocus on quality and they're going to

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Speaker 2: look at the high quality names that have delivered consistently

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Speaker 2: through successful execution over the medium to long term, and

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Speaker 2: that's the stocks I'm looking at.

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Speaker 1: Okay, just before we go, I just want to quickly

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Speaker 1: mention beck at Queensland and Bendigo and Adelaide obviously to

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Speaker 1: the other two lenders, where do they They're certainly not

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Speaker 1: the quality spectrum of Commonwealth Bank, but certainly higher values

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Speaker 1: evaluations or low evaluations. What's your take on those two? Look?

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Speaker 2: Look, you know, they're obviously good quality banks. They are

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Speaker 2: more regional in their focus and base. They're always going

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Speaker 2: to have a little bit more of a challenge in

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Speaker 2: terms of their cost of funding relative to the big

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Speaker 2: four banks, so it's always going to be a bit

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Speaker 2: different in terms of the exposure. I think they're a

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Speaker 2: bit more point in time, you know, So when you

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Speaker 2: see them come off a bit and you have a

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Speaker 2: predeposition to that style of focus, it's time to have

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Speaker 2: a look. But I've sort of, you know, in the

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Speaker 2: past of own Bendigo Bank, but you found it a

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Speaker 2: little bit more challenging to get the margins and the

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Speaker 2: return on investment that I probably want. So I'm not

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Speaker 2: ruling them out a point in time, but at the moment,

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Speaker 2: I probably prefer the three that I've already talked about.

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Speaker 2: I think they just had a longer term exposure.

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Speaker 1: Andrew, thank you for talking to fear Ingreed. No problems

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Speaker 1: as Andrew Dale, partner at ECP Asset Management, and a

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Speaker 1: reminder of course, to seek your own quality advice before

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Speaker 1: making investment decisions. If you've got something you'd like to know,

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Speaker 1: then send through your question on LinkedIn, Instagram, Facebook, or

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Speaker 1: at fearingreed dot com. Today you I'm Schinama and this

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Speaker 1: is fear Ingreed Q and DA