Do we like Macquarie’s sell call on the banks?

Yesterday, Macquarie came out with a rare call that it’s time to sell the “Big Four Banks,” and they’ve also advised clients to be underweight in everything! The crux of their view is that the current high valuation of the Australian banks isn’t justified by the fundamentals. They even doubled down on Westpac (WBC), moving from outperform to underperform; by definition, they must think their own shares are a sell. Last week, the banks hit multi-year highs, led by Commonwealth Bank (CBA), which posted all-time highs; hence, it’s not hard to comprehend some kneejerk profit-taking.

Local bank stocks also enjoyed an added tailwind this month when the UK’s largest building society made a $5.7bn bid for Virgin Money (VUK). This would have seen some switching into the “Big Four,” especially with three trading ex-dividend in May. It’s important at this stage to remember that the “Millionaires Factory” hasn’t called the banks particularly well in recent times having them as a neutral rating as they pushed ever higher, e.g. So far in 2024, ANZ, NAB and Westpac are up an average over 10% while the ASX200 has only advanced +1.6%. We acknowledge that rate cuts through 2024/5 could weigh on earnings, but they have the tailwind of improved IT efficiencies and the medium-term benefit of the increasing population.

• We expect some consolidation by the local banks but don’t see any reason for a mass exodus ahead of May’s dividends—we are currently slightly underweight the “Big Four,” with ANZ and NAB our top picks, while we continue to own CBA in our Income Portfolio.
• Subscribers should remember that stocks/sectors can trade at the high end of their valuations for longer than many people expect, i.e. we believe it gives reason to be cautious but not necessarily to sell.

Pundits keep talking down the banks, with property prices and bad debts garnering much of the attention. However, as we saw overnight, the global economy remains strong, and the consumer appears to have largely managed through rising interest rates and inflation—things should improve from here.

This morning, we kept it simple and revisited three of the ASX banks to put yesterday’s aggressive call and subsequent move into perspective.