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Bank analyst tells investors to ‘stay away’ from ASX bank shares

hazard tape stating 'keep out' representing volatility of bank shares
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ASX bank shares like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) have long been favourites of the typical ASX share portfolio. Loved for both their fat, fully franked dividends and perceived ‘safety’, you used to be hard-pressed to find an Aussie investor that didn’t have at least one (if not more) ASX bank shares in their portfolios.

But the coronavirus pandemic has turned this on its head – and now bank shares are more like the fallen angels of the ASX. All four of the major ASX banks’ share prices are still well below what they were in mid-February this year. And all except CBA are still down around 40-50%.

But even so, many ASX investors haven’t given up on the banks. National Australia Bank Ltd (ASX: NAB) had a huge level of interest in its capital raising back in April, which ended up being oversubscribed.

Banks off a ski slope?

But one banking analyst thinks that investing in bank shares in 2020 is akin to attempting to ski a ‘double-black diamond run’. According to reporting from the ABC, banking analyst Brian Johnson, of Jefferies Group, likens the banks to Corbet’s Couloir — one of the most dangerous ski runs in North America. Like all double-black diamonds, according to the ABC this run involves “uncontrollable falls along a steep, continuous pitch, route complexity, and high-consequence terrain”.

So what has this alpine metaphor got to do with ASX banks shares?

Well, Mr Johnson views the banks as proxies for the entire economy – meaning that if the economy does well, so will the banks, and vice versa. He commented, “If you believe there is an 18-month U recovery, which is my scenario, then you wouldn’t be buying but if you were, it would probably be NAB…If you think there is an L-shape recession risk, and that seems to be the growing risk by the day, without more government stimulus, you would not be buying Australian banks stocks yet”.

Mr Johnson has a keen eye on the ongoing deployment of government stimulus programs like JobKeeper and the coronavirus supplement, which he notes are scheduled to begin tapering off from the beginning of October. Likewise will other safety nets, such as the moratorium on loan and mortgage repayments and rental evictions. “We won’t know how bad things are until sometime after September”, Mr Johnson was quoted as stating. “[With] all of these economic risks, it wouldn’t surprise me if you saw [ASX bank shares] track back down to the lows that they were in March.” 

Should investors offload ASX bank shares?

I think Mr Johnson showcases several important points. Bank shares used to be attractive due to their unusually large dividend yields. Most other ASX dividend shares never offered the fully franked yields of 5, 6 or even 7% that the banks routinely did.

But those days are gone, and I think it will be a while until they return, if ever. In the meantime, I don’t think there is market-beating potential from any ASX banking share right now, and there are other, more reliable dividend shares out there instead. As such, I would avoid the ASX banks until at least the economic outlook is a little clearer and certainly more positive.

In the meantime, an ASX exchange-traded fund (ETF) might be a better option for ASX bank exposure if you are still keen for a slice of the banking pie.

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. 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 Scott Phillips.

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