Should you sell your shares in Australia’s Big 4 banks?

Credit: Canadian Pacific

The share prices of each of Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) came under pressure in Tuesday trade, after big 4 peer Australia and New Zealand Banking Group (ASX: ANZ) released its 2017 half-year results.

Although Tuesday’s results by ANZ weren’t as strong as expected, I believe there’s still some life left in the banking sector. Here’s why.

ANZ’s results

ANZ reported a weaker-than-expected set of first-half numbers, despite its cash profit surging 23% on the prior corresponding period.

According to the Fairfax Press, analysts were expecting Australia’s third-largest bank to deliver a cash profit of $3.5 billion (instead of the reported $3.4 billion for the first half) on the back of tighter cost controls and better margins.

Unfortunately for investors, ANZ failed to deliver on both accounts. Its net interest margin – a lead indicator of profitability – fell 7 basis points to 2% as competition pressures persisted. This implies that funding side challenges remain, despite the relatively low default rate. Also, even though bad debts remained low, overhead costs came in higher (notwithstanding a reduction in full-time employee head count).

Even with the missed estimates, there were positives from Tuesday’s results. ANZ lifted its return on equity by a staggering 2.1% and delivered 22% growth to earnings per share through asset sales. However, based on Monday’s closing price of $32.95, the bank trades on a trailing price-earnings of about 14.1x which leaves it fairly valued in my opinion.

What it means?

ANZ’s results were not as bad as the market appears to be making out. Although the company was unable to pay a higher dividend, business conditions in the banking sector remain favourable to the big lenders.

Whilst the market appears to be reassessing the values of NAB and Westpac ahead of the release of their results on Thursday and next Monday (respectively), I do believe ANZ’s results don’t spell the demise of the banking sector.

Although near term headwinds remain through margin attrition and property market risks, overall credit quality appears robust. This means each of the big four banks should be able to continue churning out market-leading loan growth at the expense of smaller lenders Bendigo and Adelaide Bank Ltd (ASX: BEN) and Bank of Queensland Limited (ASX: BOQ).

Accordingly, I don’t think its time to sell those bank shares just yet…

Foolish takeaway

In the midst of a competitive credit market and recent willingness for banks to lift lending rates out of cycle, ANZ, Commonwealth Bank, NAB and Westpac remain the envy of the global banking industry. Their oligopoly enables them to provide market-leading returns on equity and trade at world-leading dividend yields.

Therefore, even when any of them miss market expectations, I wouldn’t be quick to sell their shares. With each of the big 4 playing a dominant role in Australia’s banking industry, I am inclined to hold my current position and add to my position if the pullback continues.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of National Australia Bank Limited. 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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