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Hewison Insights

Is it time to dump the banks?

Andrew Hewison
Managing Director
18 Nov 2013

The below average returns of the “big four” show rather compelling numbers which pose the question: is it time to take your money and run? 

At Hewison Private Wealth, we would urge our readers to take all considerations into account and not throw the baby out with the bath water. Here’s why:

  1. All but one bank (NAB) have surpassed their previous 2007 highs, but on a long term growth trend.. At their peak in 2007, the banks on a long term average were not expensive. Therefore, if a line is drawn on a continued growth trend, the banks should be valued higher than they were back in ‘07’.
  2. The yield: The banks have the ability to sustain and grow their dividends. On current payout levels, the average yield of the big four banks is 5.5% or 7.85% after imputation credits (a refund of 30% company tax) are passed back. Yields are also expected to rise by around 5% over the coming 18 months.
  3. When a company has returned growth of 30%, Hewison Private Wealth will review clients’ individual exposure relative to other holdings in their portfolios. Prudent risk management suggests that where there is overexposure to one company, it may be time to trim some profit.
  4. A key ratio to pay attention to is the price to earnings ratio (PE). The PE indicates how many years a company pays its dividend before it equals the share price. On this basis, an investor can see how many years they would have to own a company before their investment is repaid by the dividends. The long-term average PE of the “big four” banks is around 14 times and currently sits around 14-15 times. However, based on profit forecasts this number would reduce to around 13 times by 2015.
  5. Asset Allocation: Not unlike the company specific exposure, a constant  review of your portfolio asset allocation is required. If you can see that the percentage exposure to Australian equities is more than 5% of what it should be, then perhaps it is time to take some profits from companies that have performed strongly: this could include the banks.

In our view, it’s not  time to “dump” the banks. In fact, Hewison Private Wealth is still buying some banks for clients where appropriate. With that said, the points above indicate that it’s not always cut and dry.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.