Earnings and dividend misses won't change the fact that Australia's Big Banks are among the most appealing bank stocks in the world to own, and investors shouldn't pass up the chance to buy them on the dips.
The sector hasn't exactly been in investors' good books this week with Australia and New Zealand Banking Group (ASX: ANZ) announcing a cash profit and dividend that was under consensus forecast today, while National Australia Bank Ltd. (ASX: NAB) also missed expectations on both fronts.
But the fact remains that the Big Four, which also includes Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), are still generating cash return-on-equity (ROE) and dividend yields that are well ahead of their global peers.
The share price reaction to the dividend miss is also quite telling. Disappointing investors on dividends is a cardinal sin in this market and my initial fear was that the stocks would take a big beating.
While NAB's shares have dropped around 3% over the past two days since its profit announcement, ANZ Bank inched up 0.2% to $28.82 this morning.
That hardly qualifies as a walloping and you only need to look at Woolworths Limited's (ASX: WOW) share price reaction today to see what a real beating looks like.
I think the market accepts that Big Bank dividends cannot keep growing in the face of a softening residential market and stricter regulatory requirements for banks to hold more cash to protect from an economic shock.
ANZ and NAB have kept their final dividends steady even as analysts were tipping a modest increase, but steady dividends is all that's needed to keep the Big Banks in investors' good books in my opinion.
This is because the yields that are on offer are already pretty generous at around 7-8% if franking credits are included, especially since the Reserve Bank of Australia (RBA) is likely to cut official interest rates again in the short term.
The Big Four don't even need much profit growth to keep investors onside as long as they can protect their existing dividend payout.
But that's the real focus of investors' worries. Can the banks afford to remain so generous on their handouts to shareholders?
ANZ's and NAB's results indicate that they can and fund managers at Goldman Sachs are not worried either, as they are bullish on the sector.
Goldman Sachs Asset Management has increased its holdings in the sector and thinks that the move by the Big Four to increase mortgage rates independently of the official cash rate will allow them to keep growing their earnings, according to Bloomberg.
Deutsche Bank estimates that the mortgage rate increases of between 15 and 20 basis points will lift the Big Four's profit by up to 3% and improve their net interest margin by as much as 5 basis points.
ANZ Bank's full year net interest margin, or the difference between what it charges customers and what it has to pay for funds, fell 9 basis points in 2014-15 from a year ago, while NAB's margin dipped 4 basis points due to competitive pressure.
I think Big Bank stocks continue to look attractive in light of the latest results and domestic interest rate outlook, and investors should consider buying on any weakness.
