Is it time to buy the big four banks?

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) are back in favour with at least one well-known fund manager.

Wilson Asset Management (WAM) fund manager Matthew Haupt has told unitholders of several WAM-run listed investment companies that the banks are capable of generating enough capital organically to meet newer, stricter capital requirements.

The banks typically raise hundreds of millions, if not billions from dividend reinvestment plans (DRP), where shareholders opt to take additional shares instead of cash for dividends.

The likelihood is that we have hit rock-bottom when it comes to interest rates, bad debts don’t appear to be getting worse and more cost cutting from the banks suggests that their prospects could be improving.

Veteran fund manager Geoff Wilson also thinks the banks are a reasonable bet over the next 12 months, with NAB the pick of the bunch. “The big banks look slightly cheap on a relative [price-earnings] basis. I think they’ll probably perform pretty well,” he says.

Conversely, Mr Wilson thinks it’s going to be a tough time for investors over the next 12 months, predicting the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) will be around 5% lower by the end of 2017, thanks to headwinds from rising bond yields, the end of low interest rates and high prices for many stocks.

WAM’s funds are all sitting on loads of cash, with expectations that higher interest rates will be negative for sharemarkets. WAM Capital Limited (ASX: WAM) had 39.1% of its $1.2 billion portfolio in cash at the end of October 2016; WAM Active Limited (ASX: WAM) had 41.5% of its $38.2 million portfolio in cash; WAM Research Limited (ASX: WAX) held 36% of its portfolio in fixed interest and cash and Wam Leaders Ltd (ASX: WLE) had 36% of its $389 million portfolio in fixed interest and cash, although the company is still a recent newcomer to the ASX.

Interestingly, Westpac was the only big four bank in the top 10 holdings of WAM Leaders portfolio at the end of October – despite Mr Wilson’s preference for NAB.

Foolish takeaway

Risks to the banks remain, considering their leverage to the Australian property market and the Australian economy, so investors need to weigh that up as well before jumping in.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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