In the past, there have been instances where oligopolies in the Australian bank sector have resulted in market share fights, which have negatively impacted overall market growth. This behavior has been observed in the BIG 4 banks, where each bank attempts to defend its market share by writing unprofitable loans. As a result, bank sector analysts have downgraded their assumptions on net interest margin (NIM) and earnings per share (EPS) for the next few years, which has led to a sell-off of bank stocks and a rotation towards resources.
It is important to note that shorting Australian banks may not be a viable strategy as the associated costs, such as dividends, franking credits, and borrowing costs, can add up to an annual cost of approximately 9% pa. Additionally, shorting banks will only work if they substantially cut their dividends, a scenario that is unlikely. Instead, it is more probable that Australian banks will go sideways to down for the next decade while maintaining dividend payout ratios. Therefore, they should be used as the funding vehicle for rotation towards resources, where capital growth prospects are higher.
Furthermore, fully franked Australian Bank dividend yields are attractive to Australian investors, but they have led to under-investment in technology/R&D, an unwillingness to embark on value-added M&A, and a broadly risk-averse leadership culture that prioritizes maintenance of the dividend yield as a priority. This has resulted in high dividend yields but negative capital growth over the last decade.
Foreign investor flow in Australian bank equity is also a concern as foreign investors receive no value from franking credits, and the dividend yield is the actual dividend yield to foreign investors. With US 1 Year treasury bond yields at 5.06%, it is challenging to see a scenario where foreign investors buy Australian banks for income. As a result, foreigners have turned net sellers, and it remains unclear who the marginal net buyer will be.
