• Are we about to see a contagion risk in the Australian banking sector?
  • DNR Capital’s Scott Kelly explains why he prefers insurers to banks
  • Law firm Taylor David says number of Australian business insolvencies will increase in 2023

 

The speed of the recent demise of banking entities in the US and Europe has spooked investors and customers.

It all began with the collapse of crypto-friendly bank Silvergate, followed in quick successions by Silicon Valley Bank, Signature Bank, Credit Suisse, and now, the rescue effort of San Fran-based First Republic.

AMP chief economist Shane Oliver thinks that we’re not about to see GFC Part 2, but the bank crisis does represent contagion risks.

“It does not necessarily mute contagion risk,” Dr Shane Oliver told Bloomberg. “Funding costs for banks, whether it is capital or debt, in Europe however will go up.”

Oliver’s comments have been echoed by other experts like Scott Kelly, a portfolio manager for the boutique investment firm DNR Capital.

Kelly said his funds will be pivoting away from the big Aussie banks, saying the tailwinds from higher interest rates now appears to be coming to an end for them.

“The big four banks all reported strong financial updates, and they are well-placed to deliver their strongest revenue growth in over a decade,” said Kelly.

“… but this is already captured in market expectations this year.”

Kelly said that mortgage growth is now slowing, which is a function of the uncertainty in the property market.

“In response, banks pricing competition appears to be stepping up as well. We are already seeing the big banks offer discounts and attempt to match competitors in mortgages,” said Kelly.

“Next, we are also expecting increased competition and deposits, and that will unwind some of the funding cost gains that the banks have benefited from over the last few years.”

 

Banks vs insurance stocks

Kelly also said that inflationary pressures will continue to put pressure on the cost base, and people still account for two thirds of the bank’s cost base, so that will remain a significant headwind for them.

“And then there’s a question of bad debts. Markets almost became conditioned to a low bad debt environment for the banks over the last decade or more, but asset quality will come under pressure as consumers struggle,” he added.

Overall, Kelly thinks a quick and aggressive tightening cycle will lead to a weaker housing and mortgage market with a high probability of recession.

“Our preference is for the business banks over the retail banks. SME competition appears to be contained, relative to retail,” he said.

In this regard, Kelly said NAB (ASX:NAB) remains his preferred exposure.

“We believe NAB  is better placed than peers and it’s executing well. ANZ (ASX:ANZ) and Westpac (ASX:WBC) are the value alternatives amongst the big four.

“CBA (ASX:CBA) is just too expensive, and its dividend yield at current prices is just 4%.”

All in all , Kelly sees better risk return opportunities and more attractive dividend yields elsewhere, particularly companies that are growing their dollar income over time.

“Relative to the banks, we prefer the insurers and we think they provide a meaningful offset to our underweight bank’s position,” he said.

Kelly added that his preferred exposures in the insurance space are QBE (ASX:QBE) and Suncorp (ASX:SUN).

“Both also benefit from higher interest rates through higher yields on their investment books.”

 

Insolvencies to rise in 2023

Meanwhile, leading Australian law firm Taylor David is sounding the alarm on the number of insolvencies about to hit the Australian economy in 2023.

The law firm has warned that the number of companies facing financial headwinds is likely to be significantly larger than during the GFC (global financial crisis).

Partner Scott Taylor is predicting that the financial uncertainty we’re seeing now is only just the beginning, and will end up exceeding the worst of the global slowdown in 2008.

“In many ways, what we’ve seen over the last six months is the tip of the iceberg,” Taylor said.

“When you start seeing global banks getting anxious, being sold off or collapsing, it’s a clear indication of wider uncertainty, with more to come.”

Taylor says “he expects the impact of insolvencies to be felt across most economic sectors, including construction, manufacturing, and logistics.”

“Additionally, over 50% of household fixed-rate mortgages are estimated to expire in 2023.

“These increased mortgage repayments will have a significant impact on households and the wider economy,” he said.

 

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.

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