Mocker Monday. 18 May.

The ASX Big 4 Banks

We’ve been discussing the banks this week, as they’ve all released their Q3 earnings. We found it quite a struggle to come up with a solid consensus, and the uncertainty around them was obvious in our discussions. In summary: things are very uncertain (and really not all that good), but because of that the banks are very cheap. 

Sell arguments:

• If covid triggers a recession, there will be increased defaulting on loans, further bad news for the banks. 
• Outside of covid, the broader macro environment is quite extended terrible: interest rates can’t be pushed much further downwards, debt is at all time highs. There may be reduced demand for loans for a while. 
• The recent capital raisings will further dilute the profit margins. 

Buy arguments:

• The reforms from the royal commission seem to be off the table. This will help to boost the profit margins of the banks.
• These scenarios are all well known, fear is high, and the valuations on the banks are all incredibly low. The banks are a cyclical stock, this is the bottom, and the smart money is buying now, while prices are cheap and fear is high.

For further reading on the ASX Big 4 banks:

• Why the big banks are underperforming the market (Roger Montgomery)
• Livewire markets has had a number of good articles about the banks.
  • Home loan data shows the economic cost of Lockdowns (Jonathan Rochford – Livewire Markets)
  • Bank on a 70% return: Why ’tis the season to be bullish on the Big Four (Romano Sala Tenna – Livewire Markets)
  • Banks perform badly with a flat yield curve or a debt crisis, Australia faces both (Damien Klassen – Livewire Markets)
• WBC and CBA have released their reports. We reported on the other banks releases here.

Capital Raisings

Capital raisings have been a major hallmark of the ASX response to the pandemic. With relaxed rules around how much capital can be raised, 21 companies went searching for funds and raised over $1.5Bn.

Equity raisings are a double edged sword, they clean up uncertainties around survival, and pay down debt. However, they do this by increasing the book value and share pool. This can have a diluting effect, reducing the profitability of the company (I.E. by lowering the RoE) and spreading the earnings across more shares (I.E. reducing the EPS). This can affect future valuations of the companies. For further reading, check out the following:

• Should I take part in capital raising (Richard Hemming – Under the Radar Report)
• COVID-era capital raises are different and $1.5b changed hands: This week in capital markets (Ben Williamson – Livewire Markets)
• Beware wealth destroying capital raisings (Roger Montgomery)
• Top two ways corporations raise capital (Investopedia)

BONUS Link: Covid-19 coronavirus infographic datapack (Information is Beautiful)