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Citibank says buy big bank stocks for their lack of growth

Big bank stocks are staging a comeback today with the share prices of our biggest home lenders outperforming the market ahead of the bank reporting season in May.

The market is torn as to whether the underperforming sector has turned a corner after being slugged by shocking revelations into bank practices by the Banking Royal Commission, softening property market and rising funding costs.

No one is disputing the growth headwinds buffeting the sector, but ironically, this lack of growth could be the very reason why you’d want to buy the banks if Citigroup is to be believed!

The broker has come out swinging for the big banks as it dismissed the likely risk of a credit crunch with banks restricting home loans to address concerns of lax lending practices, which in turn will trigger a significant slump in property values that will threaten the quality of the banks’ mortgage books.

“In the absence of material loan losses together with a steeper challenge to grow mortgage RWAs (risk-weighted assets), the bank dividends are, perversely, likely to rise. This will provide valuation support, making current shares price increasingly attractive,” said Citigroup.

Another true believer is Macquarie Group Ltd (ASX: MQG) who pointed out that all the bad news is in the share price and the upcoming interim results from three of the big four banks could prove to be the catalyst for a rebound in the sector.

The investment bank estimates that the sector is trading a circa 33% discount to industrial stocks compared to the longer-term average of 22%.

“In our view, the fundamental drivers underpinning 1H18 results remain broadly sound,” said the broker.

“While we accept that on balance the Royal Commission fleshed out more issues than we anticipated, we believe that stock specific risks are increasingly being captured in current valuations.”

What’s more, the banks have the option of lifting interest rates on loans to offset the increase in funding costs, and that in itself could prove to be a positive catalyst for the sector, added Macquarie.

Another catalyst is the potential for the sector to announce more capital returns. The boards of the big bank could be more inclined to consider this option for this reporting season than at any other reporting seasons in recent years to arrest the wave of negative sentiment hitting their stocks.

Bank bulls are clearly in charge this morning with Westpac Banking Corp (ASX: WBC) leading its peers higher with a 1.8% jump to $28.80 as National Australia Bank Ltd. (ASX: NAB) added 1.2% to $28.94, Australia and New Zealand Banking Group (ASX: ANZ) increased 1.1% $26.92 and Commonwealth Bank of Australia (ASX: CBA) inched up 0.4% to $71.81.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 0.5%.

Apart from CBA, the other big banks will report their interim profits in May. I am still sceptical about the sector’s ability to stage a comeback next month as I don’t think their profit announcements will decisively turn negative investor sentiment towards the sector.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Macquarie Group Limited, National Australia Bank Limited, 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 Scott Phillips.

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