Are Macquarie & now Citi correct that the banks are a sell?

On Monday, Citi joined Macquarie with a “sell call” on the major banks, which saw the sector reverse early gains to close near their intra-day lows, ANZ even slipped into negative territory. There were two major reasons behind their bearish stance:

• Citi believes the valuations of the banks are stretched considering the potential political “attacks on their profits”, i.e. when the RBA starts cutting, they will be forced to follow suit at the expense of profitability.
• Macquarie said to “sell” the banks in mid-March as the sector posted new highs, again a call on valuation grounds; good timing so far!

The cornerstone of Citi’s argument is valuation, which could be applied to the whole market when the ASX200 is challenging new all-time highs. Overall, it is an understandable view, but we question if it’s a good enough reason to exit the sector, forgoing enticing dividends and potentially incurring capital gains issues after the “Big Four” have run so hard. Also, CBA has been described as “too expensive” since we can remember. Next week, ANZ, NAB, and Westpac will report their interim earnings, which will potentially determine if the sector and market can scale new highs this FY. There are always two sides to an argument, and while valuations are rich, earnings have held up well and the sector is expected to continue to deliver a strong yield.

• Bank gains have been driven by increased valuations, which reached a 15% premium to their 3-year average; hence, we are only cautiously positive. However, we’ve seen since COVID that valuations can stretch in both directions further than people expect in plenty of pockets of equities.
• Since selling Macquarie Group (MQG) early this year, we are underweight the banks holding 12% of our Active Growth Portfolio in ANZ and NAB; we are not considering reducing this.

The banks may well underperform the Resources Sector from here through 2024/55, but we believe they do make up an important part of a balanced local portfolio.

This morning, we briefly updated our opinions on five ASX banks after the market and sector’s sharp pullback last week.

• We believe the bull market for the banks is maturing, but we don’t believe it’s out of gas just yet.