Haven Premiums Set High Earnings Bar for Aussie Banks

Watch Haven Premiums Set High Earnings Bar for Aussie Banks - Bloomberg on Dailymotion

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00:00So what explains the high premiums that we're seeing in Australia's banking sector this year?

00:06Yes, so this is the question that is constantly confusing analysts whenever I'm having this

00:11conversation with them. What exactly makes Australian banks so expensive? Well, one of

00:16the answers to that could be the defensive reputation that the sector has amid periods

00:21of volatility, as we've seen in markets this year with the trade war. Now, the sector here is very

00:26retail heavy. A lot of those profit streams are coming from the domestic customer. So investors

00:33that are looking for exposure to Australia's relatively stable and resilient economy will

00:38be looking to look to invest in the banks. So that sort of explains the strong rally in the prices

00:43that we've seen so far and therefore why we keep seeing those valuations push higher and higher.

00:50Carmelia, on the economic outlook, we had inflation numbers that were hotter than expected

00:55earlier this week. Next week, we have an RBA decision. How is this backdrop going to affect

01:01the banks?

01:03Yes, so the banks are very sensitive to the economic backdrop. As I was saying, they're very

01:09much tied to the health of the economy. They benefit when the inflation, when inflation is

01:14coming down, when rates are coming down. But on the other hand, having lower interest rates

01:19actually cuts into their margins. So it's a bit of a double edged sword there. As you mentioned,

01:23we just had hotter than expected inflation data earlier this week. If you look at the share

01:28reaction of the banks that day, they actually went down quite a bit as that inflation sort

01:34of signaled alarm bells for the health of the economy. But looking in the short to medium

01:39term, having higher inflation means the RBA is probably going to push back their next rate

01:44cut, which means that those margins will stay intact for a bit longer. So it's sort of that

01:49double edged sword for the banks.

01:54Just really quickly, we saw in the August reporting period, the risks of companies missing

01:59expectations. What can we expect this time super quickly?

02:04Yeah, so I mean, it's definitely still a risk. I would argue it's even higher because the banks

02:09are so expensive. As an example, we saw in CBA in the August reporting period, even though the results

02:15were mostly in line, there was still a sharp reaction in the price because there was sort of waning

02:19confidence as to the ongoing growth and profit outlook for that stock. So it's definitely still a risk

02:24this time around.