Banks put big pressure on the ASX ahead of budget
A big day for the banking stocks with the BIG 4 accounting for more than 45pts of the index decline, or in other words, all the weakness was associated with the banks on reports circulating that a $6bn tax over 4 years is likely to be announced in the budget tonight. Apparently this will be in the form of a new transactions tax on interbank transactions with the AFR reporting that Treasurer Scott Morrison will be calling the CEO’s of the big 4 ahead of the announcement this evening.
The banks make about $30bn annually in profit and if the $6bn figure is right over 4 years, the impost on earnings annually would be around 5%, which is big and the reason for the decent fall in share prices today. However, the Australian banks have a very good track record of passing on higher funding costs, credit risks and other headwinds to customers. According to UBS numbers, they reckon the easiest way for banks to achieve this would be to reprice their mortgage books. To offset a $1.5bn headwind they estimate the Banks would need to reprice their variable mortgage books by 12- 15bp.
We know May is a weak period for banks and this has largely played out to script, however we now need to be very conscious that we’ve seen 80% of the usual May weakness in the first 9 days of trade so clearly we now need to be sniffing around for opportunities to buy the sector after selling out of CBA and ANZ, and only partially up weighting in NAB.
Where the pain was today….all targeted towards the banks….
Staying on the banks, CBA was the weakest link by a reasonable margin today after they gave a weakish Q3 trading update this morning. Cash earnings were tad light at $2.4bn, margin a little lower which was to be expected, CET 1 at 9.6%, which is a bit below the others but importantly, their bad debt charge was very low at 11bp of gross loans versus the 17bp in the first half, which casts a further shadow on their cash earnings result.
CBA closed down -3.85% to $82.02, ANZ was off -2.64%, Westpac was down -3.52% while NAB was the best of a bad bunch ending -2.05% lower at $32.42
Commonwealth Bank (CBA) Daily Chart
Given the selling amongst the banks it was always going to be an uphill battle for the market today and after a few attempts to rally, we closed near enough to the daily lows. We had a range of +/- 40 points, a high of 5870, a low of 5830 and a close of 5840, down -31pts or -0.53%.
ASX 200 Intra-Day Chart
ASX 200 Daily Chart
Retail Sales; The retailers are doing it tough in Australia at the moment with retail sales printing -0.1% versus +0.3% expected today and unsurprisingly we’re seeing weakness amongst the listed retail players. Amazon is coming which increases competition, will reduce margins particularly in the consumer electronics businesses and will clearly be a negative for earnings. Hard to see why you would be there at the moment.
Here’s a list of the main retailers….some are getting cheap but all too hard at the moment.
Source: Bloomberg
Retail Index Daily Chart – Bearish price action continues
Henderson (HGG) & Oz Minerals (OZL); Two very different stocks however a number of similarities in terms of the feedback we’ve received over the early life of the holdings. Today HGG rallied strongly on the back of a positive note from UBS – an extract of which is below however we now sit on a nice +12% profit on this position observing the market now turning very positive a stock that it was collectively bearish on at the start of the year. We reference Oz Minerals here simply because there is often times to be patient in positions when we can, as long as we have flexibility elsewhere in the portfolio. Oz Minerals fits into that basket at the moment.
…From UBS
Henderson Group (HGG) Daily Chart
Enjoy the budget this evening – we’ll cover the main takeout’s in the AM report in the morning
Have a great night,
The Market Matters Team
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