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Headwinds for the Australian Banks

Amidst a sluggish economy and increasing rates, we've reassessed our perspective on Australian banks.

Date published
19 Jul 2023
Reece Birtles, CFA Chief Investment Officer, Australia
Matthew Davison Portfolio Manager

Portfolio implications

Bank earnings risks are skewed to the downside, and we feel that CBA in particular appears overvalued.

For portfolios focused on total return, we believe that inferior NIMs and rising potential loan losses support underweighting the banks sector vs. the S&P/ASX 200 Index.

Investors seeking an income stream that is resilient to macroeconomic volatility should be cautious of protecting against downside income risk. Saying this, our proprietary estimates of the resilience of dividends for the big four banks remain attractive, and largely in-keeping with broker consensus forecasts for franked dividend yields for the next twelve months. We are comfortable with retaining bank exposures for their income generating ability, however, our focus on downside income risk means that this is at a significant underweight relative to a yield-weighted view of the index.