Aussie banks misunderstood

Foreign investors don’t understand Australian bank valuations says Bell Potter’s Charlie Aitken

a woman

Bell Potter’s senior stockbroker Charlie Aitken says international hedge funds shorting Australian banks are uneducated and confused.

Foreign investors believe Australian banks were overpriced and were shorting them in the belief that they are due for a correction. But Mr Aitken says many foreign investors are uneducated on the nuances of the Australian banks. He says that mum and dad investors hold around 50% of each of the big four banks, including ANZ Bank (ASX:ANZ), Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac Banking Corporation (ASX:WBC). Mr Aitken suggested that the shorters were likely to get burnt.

Shares in the big four have rallied to record five-year highs, driving the market to its highest level since 2008. The big four make up around 30% of the S&P / ASX 200 Index (Index:^AXJO) (ASX:XJO) index currently.

On Monday the Australian Financial Review reported that a number of hedge funds are short the Australian banks, trying to play on the demise of emerging markets, including Australia’s biggest trading partner, China. Foreign investors believe that a downturn in China would spread to the Australian market and hit the banks.

Other analysts have also suggested that the four banks are the most expensive in the world, but that it is justified, given they have the best credit ratings in the world and their capital management is best of breed globally. They have also suggested that Australian banks can’t be compared to their international peers, because they are different, with retail investors hanging onto their bank shares because of the high dividend payments. Mr Aitken suggested foreign investors don’t understand the valuations, and there are many reasons why our banks are more expensive than American or European banks, but comparing the two was like comparing a “mango to a banana”.

Foolish takeaway

Mr Aitken suggests that for a genuine Australian bank share price correction to be sustained, you would need mums and dads to give up on the banks, which he sees as unlikely, if dividends continue to grow.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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