Why this top fund manager won’t touch bank stocks like Commonwealth Bank of Australia

Our big banks are turning into mining companies in 2018. I’m not alluding to a change in their business model or an embrace of bitcoin mining, but to capital conservatism that has been a hallmark of the mining sector over the past few years in the face of falling commodity prices.

Welcome the new fiscal conservatives!

Australia’s banking oligarchs Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) will be battening down the hatches as their businesses are likely to come under pressure this year.

It’s a stark change from only a few years ago when profits from our mining giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) were hammered by the weak outlook for raw materials, which forced their boards to drastically cut spending and curtail expansion to survive a growth famine.

It was the banks that were delivering the growth and winning the affection of investors thanks to our booming housing market and record low interest rates.

But the tables have turned. Commodity prices are holding up far better than what most were expecting while the headwinds are building rapidly for the local banking sector.

This is fuelling speculation in the media today that the Big Four will be cutting 20,000 jobs this year in the face of slowing growth and increasing difficulty in controlling costs.

In another poignant sign of increasing risks in the sector, high profile fund manager Hyperion Asset Management told the Australian Financial Review that it is avoiding Australian banks.

The comments come on the back of a very successful period for the international fund manager which has invested in Facebook and Amazon when they were a fraction of their current prices.

The fund manager is driven by a few simple rules of investing. It looks for companies that can produce five years of revenue growth, have a return on equity of at least 15% and profits that cover the amount they pay in interest by at least four times.

The risks to the banks are on the downside with potential interest rate rises, the risk of rising mortgage defaults due to record levels of household debt and higher capital ratios imposed by regulators, according to the fund manager.

Further, banks are highly leveraged and that makes them more sensitive to any market downturn and the fund manager thinks Australia’s economic outlook is subdued, which isn’t an environment for high-credit growth that was enjoyed by the banking sector in the 2000s.

But there are good opportunities outside of the banking sector. The experts at the Motley Fool have uncovered three blue-chip stocks that are worth considering for your portfolio. Click on the free link below to find out what they are.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, BHP Billiton Limited, National Australia Bank Limited, Rio Tinto Ltd., and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…


The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!