Bank stocks going forward

Hi everyone, have been following the site for a while, my first post... so go easy

Just wondering if i could have some input on the Big 4 banks...

Can they be a good investment through the next couple of years?

Are they too overpriced now?

If they do discount in the near future, what would you say about going long using Warrants or CFD's

If we are dragged into a deep recession, what stocks generally do well? (off topic sorry) thanks!

 

Based on current price, if you look at their intrinsic value's:

ANZ = underpriced based on instrinsic business value per share

NAB = underpriced

WBC = overpriced

CBA = overpriced

Now the market will do want it wants to do, but given the big 4 have a strangle hold on the banking sector in australia, you should expect some reasonable return over the long term for these companies, with some capital fluctuations to the downside at some various points.

 

Depends, on your interpretation of the length and severity of this recession. If you think it is going to be deep and long, then no. If you think we are turning the corner and we are about to ride the next wave of China's growth, then probably yes.

Most major Australian banks are aggressively recapitalising for a reason - they fear the oncoming recession. Banks tend to perform quite poorly through recessions as they have to write off a lot of bad debts, thus the banks being a quality investment has everything to do with this recession.

My opinion is that they are probably not a very safe place to be right now. My fear is that in general we are still underplaying the severity of this recession and the fantasiful idea that our economy will be back growing at 4.5%pa in around 18 months is incredible. I think the levels of credit in our economy have much further to unwind before we see any "sustainable" recovery.

The reality is that banks are still very exposed to the property market and whilst they have already provisioned for a lot of bad debt stemming from falling property prices and rising unemployment, I think that we are still under playing its potential impact on bank's balance sheets. At this stage property prices have already fallen 6.7% over the last year and unemployment is definitely on the up despite the anomaly in April's unemployment figures, and all forecasts are predicting that these trends will continue.

Yet 6 - 12 months ago most were still questioning whether we'd even see a recession and if property price gorwth would even go negative. So I think many are still unprepared for any level of significant property price falls and big increases in unemployment. Whilst it is true that Australia doesn't have a major sub prime issue, but that doesn't mean that large price falls with continued credit contraction coupled with rising and sustained unemployment can't decimate the property market and inturn the banking system.

That said lots of policies of late have been introduced to prevent major falls in property prices including, the slashing of interest rates, increase in FHOGs, the 12 months grace period before bank foreclosure on residential properties, etc. These are all good initiatives to help hold up the market in this tough time, to prevent a financial crisis amongst Australian banks, but they all come at a cost and can't be sustained indefinitely.

As you probably have already heard the FHOGs are going to be phased out by the end of the year and whilst banks will offer a 12 months grace period, they can't afford to run at losses forever. So my gut is telling me that if our economy is not starting to genuinely recover by early/mid 2010 our financial system could begin to come under quite a lot of strain.

Of course this is just considering local factors, the reality is that if this global recession is quite deep and prolonged there are many other countries/regions that will collapse well before the Australian system, and as has been seen already, what happens in one part of the world has very direct consequences for the rest of the world - including Australia.

So all in all, the Australian banks in my opinion are not worth the risk associated with them right now. We are a long way away from being out of the woods yet.

I'd say in this sort of environment you are essentially just gambling, because it is very difficult to see days/weeks ahead let alone months or years.

Anything that people will continue to buy without high amounts of credit, ie things people need to live.

 

thank you!