Half of Australians believe that big banks – specifically the big four of CBA, Westpac, NAB and ANZ – are the safest place to put their hard earned cash.

A survey, conducted by Mozo, revealed that familiarity is the key reason people persist with the big banks.

44 per cent of respondents told Mozo they choose to keep their savings with the Big Four because “they always have”.

This customer loyalty has resulted in windfall profits, year after year.

In FY22, CBA reported a profit of $9.673 billion, while Westpac delivered $3.28 billion in profits in the first half.


Source: IBS


For investors, the main drawcard of investing in the big banks is the generous dividend yields, high franking credits, and the peace of mind of owning one of the safest blue chip categories.

To give an example, if you had invested $20,000 in CBA stock back in 2010, you’d have earned more than $30,000 in dividends alone by now.

But analysts have recently reassessed their valuation models in the face of rising interest rates, inflation, and the cooling housing market.

Some are even increasingly looking at alternatives such as regional banks, mid caps, and digital banks.

Opportunity in regional banks

Given that the Big Four hold 75% of the $2 trillion plus home loans market in Australia, is there any merit in investing in regional or mid cap banks?

Whilst smaller banks can’t compete on scale against the big banks, they have their own strengths – closer relationships with customers, ability to pursue niche markets, and quicker decision making.

In Australia, consolidations over the years have left us with just three main regional and mid cap banks – AMP (ASX:AMP), Bank of Queensland (ASX:BOQ), and Bendigo and Adelaide Bank (ASX:BEN).

(In fact there were four just a month ago before ANZ snapped up Suncorp’s banking business for $4.9 billion.)

So what are the value propositions that could make these smaller regional banks a potentially good buy for investors?

M&A target

Although the Four Pillar Policy doesn’t allow mergers between the Big Four, consolidation at the smaller end has been a main feature of the sector for decades.

It all started in the late 2000s when CBA acquired WA’s Bankwest for $2.1 billion in 2018.

In the same year, St George Bank became Westpac’s subsidiary after it was acquired for $18.6bn in an all-stock deal.

Last year, Bank of Queensland bought out Melbourne-based ME Bank for $1.33 billion, and ANZ is currently awaiting regulators’ approval for the Suncorp Bank merger.

Whilst buying a stock just because it’s a takeover target isn’t good advice, acquisitions often do result in a bumped price for the target stock as the buyer will likely have to pay a market premium to entice existing shareholders.

Growth potential

More Aussies moved away from cosmopolitans to regional areas when the pandemic struck.

According to a Commbank research, migration from capital cities to regional Australia increased by 16.6% to reach a record high in the March quarter.

As more people move to the regions, more banking services will be needed –  increasing business opportunities for regional banks as well as the chances of a takeover.

Lower multiples

The regional banks are trading at lower P/E multiples to the Big Four, which are mostly trading above 15x.

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Bendigo and Adelaide Bank is trading at an 11x multiple.

The Bank of Queensland also trades at 11x, while Tasmania’s MyState is trading at 13x.

Auswide Bank, meanwhile is trading at 10x.

While lower P/E ratios don’t necessarily mean that a stock is undervalued, it does point to the fact that these stocks may potentially have room to move on the upside.

What about digital-only neo banks?

According to the Mozo survey, Aussie borrowers are missing out on lower rates if they don’t shop around for better deals elsewhere.

This includes loan and savings products from the neo banks who are offering online-only services.

“There is a lingering perception that online lenders don’t offer the same level of security, but they are actually covered by the same industry bodies and held to the same standard as brick and mortar lenders,” Kylie Moss, Mozo director, told Stockhead.

“As for authorised deposit-taking institutions (ADI), they are covered under the Australian government’s financial claims guarantee scheme.

“This means customers can have peace of mind that deposits up to $250,000 are protected in the event that the ADI fails,” she said.

Recently, there has been spectacular collapses of neo banks (Xinja, Volt), and Judo Capital is now the only pureplay digital neo bank on the ASX (Judo does have real human bankers talking directly with their SME customers).

Moss, however, believes that we’re entering a period of consolidation across the industry, rather than seeing more new neo banks emerging.

“The innovation and increased competition brought about by these neo banks have encouraged bigger banks to lift their game,” Moss told Stockhead.

“This year we have seen some of the Big Four banks branch into the digital lending space, with Commbank launching Unloan and Westpac a digital mortgage application process,” says Moss.

Outlook for bank stocks

Despite the generous dividends, around $30 billion in market cap was wiped out of the banking sector following a sharp selloff in June.

So what’s the outlook for bank stocks?

To answer that, we need to take a look at the three key drivers of a bank’s earnings.

Growth in loan volumes

Recent ABS data shows that home loans in Australia are indeed cooling down due to higher rates.

While investment home loans have increased, owner occupier home loans are down by around 10% compared to a year earlier.

Source :ABS


Despite these trends, CIO at Clime Investment Management, Will Riggall, believes that the banks’ loan books will continue to grow on the back of corporate lending.

“We are positive on the outlook for the Australian economy… and it underpins our view that GDP growth will be funded by credit growth,” Riggall said.

“We see accelerating growth in business loan volumes as companies invest after a period of low capital expenditure,” he said.

Net Interest Margin

Net interest margin (NIM) is the difference between what a bank is earning in interest on loans, compared to the amount it is paying in interest on deposits.

Over the past year, Westpac saw a 22bp decline on its NIM, CBA saw a contraction of 18bp, while NAB, and ANZ have also reported NIM compressions.

So what does a higher interest rates cycle mean for the banks’ NIM?

“While higher interest rates are not what a mortgage holder wishes to see, this has a positive impact on a bank’s NIM and is thus positive for bank earnings and dividends,” said Riggall.

Bad debts

As economic growth slows, some debts will undoubtedly not be paid back in full.

To reflect this risk, banks have a Bad and Doubtful Debt (BDD) charge as an estimate of a percentage of loans that will not be repaid.

Surprisingly, things are not as bad as it seems; Westpac for example saw its bad debt fell to a multi-year low in the June quarter.

“As we now move into a rate hiking cycle, the risk is that bad debts will increase,” Riggall conceded.

“But for now, we believe the risk of higher bad and doubtful debts is finely balanced, supporting the benefits of solid credit growth and higher NIMs for Australia’s banking sector,” he added.

Non Big Four bank stocks on the ASX

Apart from the three major midsized banks of Bank of Queensland, Bendigo and Adelaide Bank, and AMP, these are some of the smaller banks listed on the ASX:

MyState (ASX:MYS)

MyState Bank is headquartered in Hobart and has just delivered its second highest full year NPAT on record of $32m.

The bank has a $7bn home loan book with $6bn in customer deposits.

A big part of the bank’s strategy going forward is to develop its digital offering.

Auswide Bank (ASX:ABA)

Bundaberg-based Auswide has a $3.8bn loan book with a $3.05bn customer deposit base.

The bank is benefiting from the population growth in Queensland, which is above national averages.

In FY22, Auswide delivered a bottom line NPAT of $26m.

BNK Banking Corp (ASX:BBC)

Perth based BNK has a $984 loan book, with customer deposits of $965 million.

The bank has recently completed a strategic review which will pivot the bank to the higher margin SME lending business.

BNK delivered FY22 NPAT of $60m, which was a 956% increase on the previous year.

Judo Capital (ASX:JDO)

Judo has a $6bn loan book backed by $4.6bn of term deposits and $2bn of warehouse commitments.

Unlike traditional brick and mortar banks, Judo has been able to increase its NIM in FY22 (by 20bp).

Judo reported a net profit of $15.6 million in its maiden full-year results, beating IPO expectations.


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