The banking sector was historically the darling of investors,
with stocks offering steady income and high secured yields
universally. However, the 2008 Global Financial Crisis laid bare
the risky dealings by individual banks and the lack of regulatory
oversight made leeway for such practices. Or, as Warren Buffett
put it, "You only find out who is swimming naked when the tide
In the melee that ensued, Australian Banks, with their stringent
regulations and traditionalist lending ways, turned from being
the narrow-minded cousins (for opposing risky businesses) to the
poster boys of fiscal dependability. Since Dec 2012 -- 4 years
since the crisis set in -- 4 of Australia's biggest banks,
Australia & New Zealand Banking Group
Commonwealth Bank of Australia
National Australia Bank Limited
Westpac Banking Corporation
) still carry a Standard & Poor rating of "AA-" and are among
the top 50 dividend payers listed around the globe.
The AU banks likely learned lessons from the top U.S. banks -
JPMorgan Chase & Co.
Bank of America Corporation
) - and European counterparts -
Deutsche Bank AG
). The Aussies managed to bring radical changes in funding
sources, reinforce balance sheets, lower risky assets and post
healthy earnings. The reinforcement of investor confidence was a
Down Under is the Stop
Investors hunting the globe for yield would be prudent to stop in
Australia, which has a dividend yield just more than 5%, the
highest in major global equity markets. Further, apart from
reporting rising earnings over the last decade, the Aussie banks
also boast the best risk-adjusted returns and highest dividend
The Big Four down-under - Australia & New Zealand Banking
Group, Commonwealth Bank of Australia, National Australia Bank
Limited and Westpac - currently disburse dividends between $4.0
billion and $5.4 billion annually, earning their place among the
top 10 international banks. The average yield for these banks is
Notably, in a booming economy with more than 2 decades of
almost no domestic recession, Commonwealth Bank's market value
has exceeded that of the U.S. biggies like
The Goldman Sachs Group, Inc.
) and Japan's largest bank
Mitsubishi UFJ Financial Group, Inc.
Australia's fairytale returns are mainly attributable to domestic
economic stability. Not only does the Aussie government have
little debt, the country enjoys healthy macroeconomic growth and
a bright earnings outlook. The Telecom, Utilities and REIT
industries have consistently been the key growth drivers in the
past few years.
Recession? What Recession?
Since 1991, the Australian economy has functioned without any
major economic downturn, an achievement unrivalled by any other
highly developed nation. Further, the AU regulatory authority -
The Reserve Bank of Australia - maintained the highest inflation
rates among the developed countries to keep away inflation.
However, the global financial crisis did have it impact on the
Aussie banking sector. After climbing to a record high in Nov
2007, Commonwealth Bank's shares plunged almost 61% within 14
months as asset values deteriorated. Moreover, a decline in asset
quality through 2008 resulted in the slowed earnings growth at
Commonwealth in 4 years.
However, most of these banks have bounced back. Australia &
New Zealand Banking Group, Westpac and Commonwealth clocked
record profits in the first five months of 2013. Further, higher
dividend payout ratios and low bad debts stimulated a 10% gain in
Australian bank shares through the end of May. This lured many
overseas investors after bond yields sank in a gloomy macro
Yields Look Attractive: Is There a Hidden
Westpac, Australia's second-largest bank in terms of market value
pays almost 85% of its earnings to shareholders through
dividends. Commonwealth Bank has a dividend payout ratio of
roughly 75%. However, any sort of elevation in bad debts would
weigh heavily on profits.
Even without an economic crisis or drop in the housing market
boom, earnings growth is under pressure. The biggest challenge
for the Aussie lenders is growing revenues in a still muted
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BANK OF AMER CP (BAC): Free Stock Analysis
CITIGROUP INC (C): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis
GOLDMAN SACHS (GS): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
MITSUBISHI-UFJ (MTU): Free Stock Analysis
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UBS AG (UBS): Free Stock Analysis Report
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Australia's recession-free status prompted consumers and
businesses to borrow greatly. Household debt is around 150% of
disposable income, at almost similar levels to Canada but much
higher than the U.S. Additionally, home prices in the island
country are overvalued by almost 70%.
However, the tale of long-term growth for the banking sector is
presently on edge. Banks look overpriced, but that's sustainable
by low interest rates and extraordinary quantitative moderation
in various parts of the world. As long as these continue, Aussie
banks will prevail with healthy dividend yields. But the economy
always in a state of flux, nobody can predict for how long.