Are Australia’s big four banks oversold?

Credit: NAB

Shares in Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have lost 5% to 10% in the last five trading days, igniting concerns that the current sell-off is the start of another bear market.

In my view, these concerns are overblown with the following two reasons possibly explaining the sell-off.

Brexit vote

Need I say it, but Britain’s referendum on whether it stays in the European Union (EU) appears to be at the forefront of investors’ minds at present. The uncertainty spells disaster for financial market sentiment and specifically, global banking stocks.

If Britain were to exit, European banks are likely to relocate headquarters to EU regulation compliant countries (such as Germany), leaving London — the global headquaterts of banking — in turmoil. This means market fears around European banking stocks’ future appears to be justified, given a Brexit could impact earnings.

Australia’s big four banks appear to be caught in the cross-fire. Our big four banks are well insulated against foreign sovereign risks, given their reliance on Australian housing as a key source of earnings. Each also has a robust capital position thanks to APRA reforms requiring a higher CET-1 ratio (compared to international standards). This should mean they are safer than international peers, making the comparison to European banks ill-fated.

As all four currently trade at historically low forward price-earnings ratios, I believe much of the Brexit risk is already priced in. This, alongside their lucrative fully-franked dividends, makes the pullback in share price adequate compensation for the long-term investor, in my view.

Tax time

Another reason for the sell-off could be the phenomenon known as “tax time selling”. Each year in June, the S&P/ASX 200 Index (ASX: XJO) underperforms regional markets as investors crystallise capital gains or losses in preparation for their income tax returns.

The phenomenon causes perennial underperformance on the Australian share market, with June generally being the worst trading month each year. Accordingly, a possible explanation for the sell-off in bank stocks could be this trend as well.

Whilst there is a risk that a Brexit could impact earnings, explaining part of the decline, I believe the falls have been exacerbated by tax time selling making the current pull back a good entry opportunity.

Foolish takeaway

Australia’s big four banks are some of the safest in the world. Although global events can impact earnings adversely, I believe the current dip in the respective share prices of ANZ, CBA, NAB and Westpac makes them all buys today.

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Motley Fool contributor Rachit Dudhwala owns shares of National Australia Bank Limited and Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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