1 00:00:05,640 --> 00:00:07,920 Speaker 1: Welcome to the Fear and Greed business Interview. I'm sure 2 00:00:07,960 --> 00:00:10,200 Speaker 1: and Alma, we've talked a lot from the last few 3 00:00:10,240 --> 00:00:12,760 Speaker 1: days about the great rotation, the shift out of bank 4 00:00:12,800 --> 00:00:15,120 Speaker 1: stocks and into the miners off the back of China's 5 00:00:15,160 --> 00:00:18,640 Speaker 1: economic stimulus, But what does it actually mean for those 6 00:00:18,720 --> 00:00:21,360 Speaker 1: investing in the banks? What's the outlook for the sector 7 00:00:21,440 --> 00:00:24,320 Speaker 1: considering interest rates will be heading down again some point 8 00:00:24,480 --> 00:00:27,280 Speaker 1: in the future and competition in the home lending market 9 00:00:27,360 --> 00:00:30,080 Speaker 1: appears to be heading up again. Remember this is general 10 00:00:30,080 --> 00:00:33,040 Speaker 1: information only, and you should seek professional advice before making 11 00:00:33,080 --> 00:00:37,680 Speaker 1: investment decisions. Nathan Zaia is Morning Stars at Bank Analyst. Nathan, 12 00:00:37,760 --> 00:00:38,880 Speaker 1: welcome back to Fear and Greed. 13 00:00:39,280 --> 00:00:39,920 Speaker 2: Thanks for having you. 14 00:00:40,560 --> 00:00:43,560 Speaker 1: What did you make of the rotation last week? Really 15 00:00:43,560 --> 00:00:46,159 Speaker 1: a great rotation might be overstating it just a little bit, 16 00:00:46,159 --> 00:00:49,640 Speaker 1: but the rotation out of bank stocks to miners. Is 17 00:00:49,640 --> 00:00:50,600 Speaker 1: that what happened? Do you think? 18 00:00:51,560 --> 00:00:56,760 Speaker 2: Well, it's interesting, is that what caused the divergence in shephas' 19 00:00:56,800 --> 00:00:59,640 Speaker 2: performance between them in the first place. I think there's 20 00:00:59,680 --> 00:01:02,840 Speaker 2: been a lot of different factors. And look, we don't 21 00:01:02,880 --> 00:01:06,800 Speaker 2: sit here and try to work out for investors which 22 00:01:06,800 --> 00:01:09,399 Speaker 2: sector might be hot in the next a short while, 23 00:01:09,440 --> 00:01:12,440 Speaker 2: and we might want to raritate. You know, we're valuing 24 00:01:12,480 --> 00:01:15,759 Speaker 2: businesses on the fundamentals. But you know, I would say 25 00:01:15,959 --> 00:01:17,920 Speaker 2: if you look at our plus to fair value for 26 00:01:18,000 --> 00:01:20,959 Speaker 2: the major banks, like on average, we thought they were 27 00:01:21,000 --> 00:01:24,759 Speaker 2: around twenty to twenty five percent overvalued. In CBA's case, 28 00:01:24,840 --> 00:01:27,760 Speaker 2: you know, it's been over forty percent overvalued. And if 29 00:01:27,840 --> 00:01:30,160 Speaker 2: you look at the big miners like Beach being reared, 30 00:01:30,640 --> 00:01:35,400 Speaker 2: roughly fifteen percent overvalued now, so you know the relative 31 00:01:35,640 --> 00:01:38,920 Speaker 2: that we did see more value in the miners versta banks. 32 00:01:38,920 --> 00:01:41,560 Speaker 2: So I guess it makes sense for a bit of 33 00:01:41,560 --> 00:01:46,039 Speaker 2: a ritation. But I point investors to other sectors outside 34 00:01:46,040 --> 00:01:48,560 Speaker 2: of banks and miners. I don't think it should always 35 00:01:48,600 --> 00:01:54,760 Speaker 2: be one or the other. There's names in industrials in healthcare, 36 00:01:55,040 --> 00:01:58,520 Speaker 2: sumacyclical that we think are much better value. So yeah, 37 00:01:58,640 --> 00:02:02,040 Speaker 2: I mean some of it. The price of banks has 38 00:02:02,120 --> 00:02:05,160 Speaker 2: sold off as the miners have gone up, so probably 39 00:02:05,200 --> 00:02:08,480 Speaker 2: is some of that happening. But yeah, I mean the 40 00:02:08,520 --> 00:02:11,320 Speaker 2: past four months bank shares have been on a tear 41 00:02:11,400 --> 00:02:14,560 Speaker 2: and really surprised everyone. So I'm not surprised that some 42 00:02:14,639 --> 00:02:16,399 Speaker 2: heats coming out of the share proces. 43 00:02:16,720 --> 00:02:20,560 Speaker 1: Okay, so let's just think about what the outlook is 44 00:02:20,720 --> 00:02:23,360 Speaker 1: for bank shareholders. If you've held them for a while, 45 00:02:23,440 --> 00:02:26,000 Speaker 1: for the past couple of years, you're probably pretty happy 46 00:02:26,280 --> 00:02:30,400 Speaker 1: because you've had plenty of couple appreciation to come off bank. 47 00:02:30,440 --> 00:02:33,600 Speaker 1: You said forty percent of a priced on on valuation. 48 00:02:34,080 --> 00:02:35,519 Speaker 1: Where does that go from here? 49 00:02:35,560 --> 00:02:39,320 Speaker 2: Do you think? It's a difficult one to answer, And 50 00:02:39,320 --> 00:02:42,079 Speaker 2: I mean, we are one that probably got wrong over 51 00:02:42,120 --> 00:02:47,360 Speaker 2: the last few years, but we've got some pretty optimistic 52 00:02:47,480 --> 00:02:51,840 Speaker 2: forecasts that underpin that valuation in terms of loan growth 53 00:02:51,880 --> 00:02:55,480 Speaker 2: being better than it has been in recent years. We 54 00:02:55,600 --> 00:02:58,880 Speaker 2: see margins improving a little bit from where they are, 55 00:02:59,040 --> 00:03:02,480 Speaker 2: loan losses staying pretty low over time, efficiency gain, So 56 00:03:02,480 --> 00:03:04,280 Speaker 2: we put all that in the mix, and we still 57 00:03:05,200 --> 00:03:08,440 Speaker 2: think it's expensive. So for that sort of price to 58 00:03:08,480 --> 00:03:11,519 Speaker 2: be justified, I think even more needs to go right, 59 00:03:12,400 --> 00:03:15,840 Speaker 2: And it probably isn't really trading on the fundamentals at 60 00:03:15,840 --> 00:03:19,480 Speaker 2: the moment. You know, there probably is just money piling 61 00:03:19,520 --> 00:03:22,640 Speaker 2: into whether it be the index or or the sector 62 00:03:22,720 --> 00:03:26,200 Speaker 2: as a whole. So yeah, we can speculate on why 63 00:03:26,240 --> 00:03:29,280 Speaker 2: it's so expensive, but yeah, all we can do is 64 00:03:29,320 --> 00:03:32,720 Speaker 2: try to value it, and we think over time it's 65 00:03:32,840 --> 00:03:36,560 Speaker 2: likely to converge f our forecasts are career. 66 00:03:37,520 --> 00:03:39,960 Speaker 1: Okay, what about the other three and now west Pak 67 00:03:40,000 --> 00:03:43,840 Speaker 1: and AINSD that's in order of size. They're still overvalued. 68 00:03:43,880 --> 00:03:45,560 Speaker 1: Are you saying they're not as much as the common 69 00:03:45,600 --> 00:03:46,120 Speaker 1: of thank. 70 00:03:46,200 --> 00:03:49,840 Speaker 2: Yeah, exactly. So they're nab On west Pack around fiftep 71 00:03:49,920 --> 00:03:54,160 Speaker 2: cent ourvalue as a not so much. I think there's 72 00:03:54,160 --> 00:03:58,720 Speaker 2: been some uncertainty around potential penalties and some cultural and 73 00:03:58,800 --> 00:04:02,240 Speaker 2: governance issues which are is probably weighing on the share price, 74 00:04:02,560 --> 00:04:06,240 Speaker 2: and even the integration of some court bank probably has 75 00:04:06,680 --> 00:04:10,720 Speaker 2: some investors nervous and preferring the other banks over runs 76 00:04:10,760 --> 00:04:11,600 Speaker 2: it for that reason. 77 00:04:12,960 --> 00:04:15,160 Speaker 1: Is there a big difference between the banks? Because you 78 00:04:15,160 --> 00:04:17,920 Speaker 1: can make an argument just buy an Aussie bank and 79 00:04:18,640 --> 00:04:22,039 Speaker 1: sort of rising tide floats or boats and whatever. The 80 00:04:22,040 --> 00:04:25,160 Speaker 1: opposite of that also happens, So you know, is there 81 00:04:25,160 --> 00:04:26,400 Speaker 1: a lot of difference between them. 82 00:04:27,760 --> 00:04:32,240 Speaker 2: They're obviously exposed to the Australian economy, but the Nabineans 83 00:04:32,279 --> 00:04:35,039 Speaker 2: that have a bit more of a business tilt as 84 00:04:35,040 --> 00:04:39,359 Speaker 2: opposed to CBA and Westpac and on the funding side 85 00:04:39,360 --> 00:04:41,400 Speaker 2: as well, so you see a lot more of the 86 00:04:41,600 --> 00:04:47,200 Speaker 2: household deposits in CBA and Westpacs and there are differences, 87 00:04:47,240 --> 00:04:50,640 Speaker 2: but like you said that, they're still very exposed to 88 00:04:50,880 --> 00:04:55,400 Speaker 2: each of those sectors or trends anyway. But yeah, there 89 00:04:55,440 --> 00:05:00,680 Speaker 2: are some small differences. CBA a lot higher return earning banks, 90 00:05:00,760 --> 00:05:04,400 Speaker 2: so it does mean they generate a lot more organic capital, 91 00:05:04,520 --> 00:05:07,760 Speaker 2: so that does deserve a premium. So yeah, there are 92 00:05:08,000 --> 00:05:11,320 Speaker 2: some differences, but yeah, definitely competing with each other across 93 00:05:11,360 --> 00:05:11,760 Speaker 2: the board. 94 00:05:12,440 --> 00:05:14,359 Speaker 1: Stay with me, Nathan, we'll be back in a minute. 95 00:05:21,640 --> 00:05:25,120 Speaker 1: My guest today is Nathan Zayah, senior equity analyst at 96 00:05:25,200 --> 00:05:28,919 Speaker 1: morning Star Competition. We've got some figures out of OPRAA 97 00:05:29,160 --> 00:05:32,280 Speaker 1: this week and it suggests that in terms of market share, 98 00:05:32,680 --> 00:05:35,600 Speaker 1: Commonwealth Bank is competing more aggressively, and I'm talking about 99 00:05:35,640 --> 00:05:39,560 Speaker 1: mortgage market here, same with Macquarie. Looks like National Australia 100 00:05:39,560 --> 00:05:42,120 Speaker 1: Bank has gone backwards in terms of the market share, 101 00:05:42,120 --> 00:05:44,600 Speaker 1: which the inference in all this is that they're competing more, 102 00:05:44,600 --> 00:05:46,839 Speaker 1: We're getting more cash backs that sort of thing. What's 103 00:05:46,920 --> 00:05:49,240 Speaker 1: it mean for earnings for the banks when, particularly in 104 00:05:49,240 --> 00:05:51,520 Speaker 1: the Comonwealth Bank, it's the biggest mortgage lender in the country, 105 00:05:51,600 --> 00:05:54,479 Speaker 1: When it starts getting more aggressive because it wasn't last year, 106 00:05:54,720 --> 00:05:57,719 Speaker 1: it's come back this year. What's it mean for earnings? Yeah, 107 00:05:57,920 --> 00:06:01,359 Speaker 1: I think it depends what is happening on the funding side. 108 00:06:01,400 --> 00:06:04,600 Speaker 1: That's I guess pushing them, are encouraging them to be 109 00:06:04,640 --> 00:06:08,760 Speaker 1: a little bit more aggressive as well. I think there 110 00:06:08,800 --> 00:06:11,120 Speaker 1: probably is a little bit of headroom to be a 111 00:06:11,160 --> 00:06:14,279 Speaker 1: little bit more generous on landing rates. We've seen a 112 00:06:14,279 --> 00:06:16,600 Speaker 1: little bit of heat come out of the deposit market 113 00:06:16,880 --> 00:06:19,520 Speaker 1: and some of that is pricing in lower cash rates. 114 00:06:20,120 --> 00:06:22,520 Speaker 1: They've repaid the TFF as well, so there's a little 115 00:06:22,560 --> 00:06:26,200 Speaker 1: bit less of a need to hold that extra liquidity. 116 00:06:26,720 --> 00:06:30,039 Speaker 1: So yeah, I think part of that is being passed 117 00:06:30,040 --> 00:06:34,160 Speaker 1: on to borrowers in terms of and like you said, 118 00:06:34,200 --> 00:06:38,000 Speaker 1: the competition to win a new borough or a refinancing. 119 00:06:38,640 --> 00:06:41,080 Speaker 1: So it kind of tells you that the banks are 120 00:06:41,400 --> 00:06:43,880 Speaker 1: happy with the sort of returns that they can get 121 00:06:44,160 --> 00:06:46,279 Speaker 1: on homelands at the moment. And I think there was 122 00:06:46,320 --> 00:06:51,120 Speaker 1: a lot of talk around them not justifying or making 123 00:06:51,120 --> 00:06:53,840 Speaker 1: a return above their cost of capital for a little while. 124 00:06:53,920 --> 00:06:56,600 Speaker 1: So I think that the outlook does look a little 125 00:06:56,640 --> 00:07:00,400 Speaker 1: bit better. And look, you mentioned CBA, I want to 126 00:07:00,520 --> 00:07:02,960 Speaker 1: rule out NAP and west Pac either, like in the 127 00:07:03,000 --> 00:07:06,320 Speaker 1: near term, I think, well, all the majors are pretty 128 00:07:06,360 --> 00:07:09,159 Speaker 1: much in a position now where they're managing margin but 129 00:07:09,600 --> 00:07:13,040 Speaker 1: they don't want to lose share, and not materially, so yeah, 130 00:07:13,040 --> 00:07:16,240 Speaker 1: i'd expect that competition to sort of continue over the 131 00:07:16,320 --> 00:07:17,280 Speaker 1: next felve months. 132 00:07:17,520 --> 00:07:20,880 Speaker 2: And west Pac were reiterated it's it's ambition to grow 133 00:07:21,040 --> 00:07:23,240 Speaker 2: at least in line with the market. They've made a 134 00:07:23,280 --> 00:07:28,680 Speaker 2: lot of process improvement consistency in their lending processes as well, 135 00:07:28,720 --> 00:07:31,680 Speaker 2: which they think is going to help win over brokers. 136 00:07:31,720 --> 00:07:35,800 Speaker 2: And I guess most banks put point to improving MPs score, 137 00:07:35,840 --> 00:07:38,480 Speaker 2: so it can be hard to pinpoint which is the 138 00:07:38,560 --> 00:07:41,200 Speaker 2: right one. But yeah, I think a lot of the 139 00:07:41,240 --> 00:07:46,000 Speaker 2: trends in terms of time to approval and consistency, it 140 00:07:46,040 --> 00:07:50,280 Speaker 2: looks like all the majors are competitive again. So yeah, 141 00:07:50,520 --> 00:07:53,200 Speaker 2: I think it's going to be an interesting market. I 142 00:07:53,280 --> 00:07:55,480 Speaker 2: don't think that you can expect much in the way 143 00:07:55,520 --> 00:07:58,280 Speaker 2: of margin expansion giving the competitive environment. 144 00:07:59,480 --> 00:08:01,760 Speaker 1: What about when interest rates start falling and they will 145 00:08:01,800 --> 00:08:05,280 Speaker 1: eventually start falling, but late this year or into next year, 146 00:08:05,920 --> 00:08:08,800 Speaker 1: is that good for bank earnings? Bad for bank earnings? 147 00:08:08,920 --> 00:08:11,360 Speaker 1: Where's that sit in the competitive spectrum? 148 00:08:11,760 --> 00:08:15,080 Speaker 2: Yeah, Well, their funding costs won't be as falling as 149 00:08:15,120 --> 00:08:17,400 Speaker 2: much as their lending rates because they have some very 150 00:08:17,440 --> 00:08:21,240 Speaker 2: low savings accounts and transaction accounts which they don't pay 151 00:08:21,480 --> 00:08:24,960 Speaker 2: much on, so all their sequel lower rates would be 152 00:08:25,080 --> 00:08:28,840 Speaker 2: negative for bank margins. But the intensity of competition is 153 00:08:28,840 --> 00:08:32,040 Speaker 2: what really matters. I think that's the key variable, and 154 00:08:32,400 --> 00:08:35,440 Speaker 2: banks aim to manage both lending and deposit rates to 155 00:08:35,480 --> 00:08:38,079 Speaker 2: try and get a margin where they're making an out 156 00:08:38,080 --> 00:08:40,920 Speaker 2: of a return. Se Like we've seen in the last 157 00:08:40,960 --> 00:08:45,040 Speaker 2: little while, rates flew up and the banks didn't capture 158 00:08:45,120 --> 00:08:47,280 Speaker 2: all the margin upside you would have expected, so I 159 00:08:47,280 --> 00:08:50,720 Speaker 2: think the same will happen on the way down. So yeah, 160 00:08:50,920 --> 00:08:54,880 Speaker 2: I'd expect some margin pressure, but not for it to 161 00:08:54,880 --> 00:08:58,199 Speaker 2: be material and probably won't happen with the first cash 162 00:08:58,200 --> 00:09:00,800 Speaker 2: red cut. But over time I think has ruined for 163 00:09:00,880 --> 00:09:04,319 Speaker 2: the banks not to pass on everything to borrowers, be 164 00:09:04,559 --> 00:09:08,400 Speaker 2: a little less generous on term deposits and savings accounts 165 00:09:08,440 --> 00:09:10,480 Speaker 2: as well, and I think in a lower rate environment, 166 00:09:11,200 --> 00:09:15,079 Speaker 2: probably is less motivation or incentive for those savers to 167 00:09:15,200 --> 00:09:19,240 Speaker 2: be making sure that they're getting the best savings rate 168 00:09:19,320 --> 00:09:21,920 Speaker 2: that they can and making sure they qualify for those 169 00:09:22,000 --> 00:09:23,959 Speaker 2: bonus rates, so they'll probably be a little bit of 170 00:09:24,480 --> 00:09:26,959 Speaker 2: an easy on the funding side of things as well. 171 00:09:27,320 --> 00:09:30,640 Speaker 2: But yeah, all up, it's a negative, but the banks 172 00:09:30,720 --> 00:09:34,760 Speaker 2: generally manage both sides of bunchee Younathan. 173 00:09:34,800 --> 00:09:37,040 Speaker 1: You said all else being equal before you started that 174 00:09:37,880 --> 00:09:40,760 Speaker 1: particular comment, and it's very true with banks, all else 175 00:09:40,840 --> 00:09:43,800 Speaker 1: being equal, and they never really are totally equal, particularly 176 00:09:43,800 --> 00:09:46,360 Speaker 1: when competition comes into it. What about outside the majors 177 00:09:46,600 --> 00:09:50,000 Speaker 1: the Bank of Queensland's a Bendigo and Adelaides. Those regionals 178 00:09:50,080 --> 00:09:51,840 Speaker 1: have had a tough time of it. Their funding costs 179 00:09:51,840 --> 00:09:55,240 Speaker 1: have been more expensive. For a number of years now. 180 00:09:55,720 --> 00:10:00,600 Speaker 1: We have seen Bank of Queensland in particular struggle chare wise, 181 00:10:00,800 --> 00:10:03,880 Speaker 1: Bendy got Adelaide the long term CEO step down. At 182 00:10:04,040 --> 00:10:05,880 Speaker 1: what's the prospect for some of these regionals? 183 00:10:06,360 --> 00:10:08,920 Speaker 2: Yeah, Ben, you go. Actually it does have a pretty 184 00:10:09,160 --> 00:10:12,680 Speaker 2: favorable funding mix. They do have a lot of deposits 185 00:10:12,679 --> 00:10:17,480 Speaker 2: and within that transaction accounts and some savings which can 186 00:10:17,559 --> 00:10:21,600 Speaker 2: be lower than the term deposit rate. Back of Queensland 187 00:10:21,760 --> 00:10:24,839 Speaker 2: is the one that does have that great reliance on 188 00:10:24,920 --> 00:10:27,800 Speaker 2: the term deposits. So if we do get into an 189 00:10:27,880 --> 00:10:32,199 Speaker 2: environment which I expect where the pressure or the intensity 190 00:10:32,240 --> 00:10:36,960 Speaker 2: on deposit rates eases. The box stands to benefit quite 191 00:10:37,000 --> 00:10:39,160 Speaker 2: materially from that because that is a big part of 192 00:10:39,240 --> 00:10:42,840 Speaker 2: its funded So yeah, I think the outlook is probably 193 00:10:42,920 --> 00:10:45,560 Speaker 2: better for BOP than it has been in recent times. 194 00:10:45,920 --> 00:10:49,440 Speaker 2: But you know, they've had operational issues and governance issues 195 00:10:49,480 --> 00:10:51,800 Speaker 2: that they're working through as well, so they need to 196 00:10:51,840 --> 00:10:55,319 Speaker 2: make sure they execute on that and hopefully capture some 197 00:10:55,440 --> 00:10:58,280 Speaker 2: upside from lower funding costs as well. 198 00:10:59,040 --> 00:11:00,800 Speaker 1: So it's going to be fun being a bank analyst 199 00:11:00,840 --> 00:11:03,920 Speaker 1: for the next six months. Nathan. It's always fun, it 200 00:11:04,040 --> 00:11:06,520 Speaker 1: always is. But I mean, but there'll be a bit 201 00:11:06,600 --> 00:11:08,120 Speaker 1: going on, I suppose, it's my question. 202 00:11:08,600 --> 00:11:13,679 Speaker 2: Yeah, yeah, yeah, definitely. When rates are moving, there's always 203 00:11:14,320 --> 00:11:17,959 Speaker 2: different strategies and pricing action from the banks, and yet 204 00:11:17,960 --> 00:11:20,400 Speaker 2: it'll be interesting to see how he reacts. 205 00:11:21,200 --> 00:11:23,480 Speaker 1: Nathan, thank you for talking to Fear and Greed Thure. 206 00:11:23,559 --> 00:11:24,199 Speaker 2: Thanks for having me. 207 00:11:24,800 --> 00:11:27,760 Speaker 1: That was Nathan Zaiah, Senior equity analyst and bank analyst 208 00:11:27,840 --> 00:11:30,960 Speaker 1: at morning Star. This is the Fear and Greed Business Interview. 209 00:11:31,120 --> 00:11:33,880 Speaker 1: Remember this is general information only, and you should seek 210 00:11:33,920 --> 00:11:37,440 Speaker 1: professional advice before making investment decisions. Join us every morning 211 00:11:37,480 --> 00:11:39,559 Speaker 1: for the full episode of Fear and Greed Daily Business 212 00:11:39,640 --> 00:11:42,360 Speaker 1: use for people who make their own decisions. I'm Sean Elmont. 213 00:11:42,720 --> 00:11:43,319 Speaker 1: Enjoy your day.