Market Matters Afternoon Report Friday 8th April 2016

Afternoon Report 08/04/2016

Market Matters Afternoon Report Friday 8th April 2016

Good Afternoon everyone

Market Data

What Mattered Today
A weak session overall but it could have been a lot worse with the index finishing down -26pts, but importantly, more than +40pts up from the intra day lows. It a seemed there was a BIG portfolio being set between 11 and 12 – which is where the majority of the buying took place. Still, overall value was low ($3.4bn) and it was the classic defensive style sectors that did OK in Utilities and Healthcare. That said, Material stocks, led by Fortescue (FMG) and RIO were strong which was pleasing. Fortescue (FMG) currently sits in the Market Matters Portfolio

Interesting to see the intra-day chart below of the ASX 200 with the market briefly dropping below the 4900 level in early trade, only to rally back above it

As usual the banks were the swing factor and although they rallied a long way from their lows, they still caused a major drag on the market – and accounted for 11 of the 26 index points lost today. As seems to be the way of late CBA was the outperformer and rallied hard after trading briefly below $70 today – it’s lowest level since 2013.

If we’re looking for reasons why the banks are under such significant pressure, it seems to be more a combination of factors conspiring against them – rather than one main catalyst. Here they are as we see them;

No growth – we assume pretty much flat earnings for the banks between 2016-2018 due to normalisation of the bad debt charge and a higher share count due to equity issues.
APRA & Capital – capital requirements to lift but no one knows by how much, short term funding to be increased, plus cultural supervision, and macro-prudential supervision on lending standards in housing. Basel IV will be released at end of 2016, APRU to consult with banks in 2017, and new capital requirements to be introduced 2018 it would seem. Whatever the outcome, it probably means more shares on issue, an increase in Risk Weighted Assets which will trim earnings
David Murry/Financial Systems Inquiry – Mr Murray has made comments around a on 12% ROE as reasonable for a bank. Currently the big 4 range from 17% ROE for CBA to 12% ROE for ANZ, while BEN and BOQ are sub 10 so they should get an ROE uplift from holding less capital
ASIC BBSW – ANZ and now WBC in court with ASIC regarding interest rate manipulation
Arrium/Bad Debts - It seems from initial numbers that banks have around $200m exposure each, media talking about 45% haircut or $90m charge each.
Dividend payouts in question – the major banks payout ratios 75%-80% are high and above some of the banks targeted range, dividends could be cut.

So, it’s a fairly extensive list BUT banks are cheap and it really comes down to how much is now priced in. We think banks will largely range trade for much of this year. Buying extreme panic seems to way forward here and selling less extreme panic – or even optimism!!

Stocks & Sectors Today

Source; Bloomberg

***Keep an eye out for the Weekend Report out Sunday Morning***

ASX 200 Movers

Regards,
The Market Matters Team
Level 12 28-34 O'Connell St
Sydney NSW 2000

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 8/4/2016 5:00pm
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