Since the beginning of May, Westpac Banking Corp (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) have fallen hard.
I think now may be a good time to take stock of what's going on with the big four this month.
It's been results season with some decent (Westpac) and some mediocre (ANZ) numbers, and all banks except CBA went ex-dividend, which drove the share prices down. So far nothing unusual. However, the big driver for the banks' demise this May has been the Federal Budget, which is imposing a new levy of around $1.5 billion per year onto the big banks.
Pretty bad news and we need to be mindful that the fab four could offload the levy onto their shareholders by way of cutting dividends. Alternatively they could pass the levy on to their customers' mortgages.
Both scenarios would increase churn from the big four to the international banks that operate in Australia, or to the smaller Aussie banks like Bendigo and Adelaide Bank Ltd (ASX: BEN) and the Bank of Queensland Limited (ASX: BOQ). Or customers could even go to specialised mortgage brokers such as Mortgage Choice Limited (ASX: MOC), all of which have been spared the levy.
However, nothing can go down in a straight line forever and as legendary investor Warren Buffet once said: "Be fearful when others are greedy and greedy when others are fearful."
And indeed, despite all the uncertainty there are some signs that the big bank sell-off was an overreaction.
For example, Westpac's share price rose recently after it quantified the impact of the levy to its shareholders. Nothing too scary. The levy will cost 8c per share. Westpac stock was down over 400c. We could see some further recovery across the sector over 2017, and right now may be a good time to buy.
Let's not forget that the big banks will remain core income stocks. Once they have adjusted to the new levy and lowered growth prospects, they may even prove to be less volatile income stocks.
They will most likely continue to pay nice fully franked dividends and with the current low prices, yields look even juicier, with some creeping up over a tax-adjusted 8.5% with the NAB.
Wanna catch 'em all? A good way of owning all the banks mentioned in this article is via a low-cost exchange traded index fund that tracks the whole banking sector such as the VanEck Vectors Australian Banks ETF (ASX: MVB).
