Banks may no longer be a winning trade for investors

It’s been such a losing trade over the years that selling shares in the major banks has even got its own name, the “widow-maker”.

But so far this month it’s also been a winner for any investor brave enough to do it, prompting talk that now is finally the time to ditch the banks.

May is usually a bad month for all shares so the fall of 3.5 per cent to date for the market shouldn’t really come as too much of a surprise.

But the performance of the four banks, that account for almost 30 per cent of the major S&P ASX 200 index, has been particularly bad, even taking into account that May is also traditionally a bad month for them. The banks index is on track to post its worst May performance for 44 years, according to Bell Potter. 

It’s important to note that ANZ, National Australia Bank and Westpac have paid a dividend in May, and that can exaggerate any sell-off.

The major index has shed 200 points so far this month and together ANZ, Westpac, Commonwealth Bank and National Australia Bank account for most of it, according to Bloomberg.

Shares in Westpac have fallen 14 per cent, ANZ is down 15 per cent, NAB is down 14 per cent and CBA is down 9 per cent, the one major that hasn’t paid a dividend.

It all started with their latest reporting season.

The word “subdued” was thrown around a lot after ANZ, Westpac and NAB delivered their numbers and CBA updated investors with a quarterly report. 

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The short sellers have increased their positions in CBA and Westpac, with reasons to sell the banks wide and varied. 

For a start, valuations are stretched. The banks are trading on a forward price to earnings ratio of around 14 times which is high by historical standards, with the average PE since 1993 around 12.5 times

Trading on a price-to-book ratio of around 1.9 times and a return on equity of 14 per cent, they are also on the expensive side on other valuation measures, according to UBS.

Elsewhere, and in no particular order, reasons to sell the banks could include their low level of bad and doubtful debts that will likely have to rise eventually, a slowdown in the economy that’s anticipated to be just around the corner.

There’s also a property bubble about to pop, dividend payouts that are too high and the regulators that are out to get them by making them hold more capital.

If all of that’s not enough, then there is the latest tax from the federal government that, while tipped to be passed on, could also increase over time.

Sell indeed. Although not everyone thinks that.

Bell Potter’s Richard Coppleson says the 10 per cent sell-off this month for the banks is about par for the course and, although he can see them falling further in the short term thanks to a Wall Street that’s heading lower, he believes the banks will recover in the second half of this year.

He thinks it is best to wait until July or later before looking at them again.

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Bank shares have been good for investors over the years thanks to record profits, the poor performance of other sectors and the most ferocious global chase for yield by investors that’s ever been seen.

Extremely accommodative monetary policy settings across Europe, Japan and the United States sent interest rates to record lows and helped to propel the four major Australian banks into the top 15 banks globally by market capitalisation for a time.

Now that global interest rates are heading higher it makes sense that the banks might not be so desirable for investors but the dividends they pay out are still compelling and with so much debt around, rates can’t rise too far.

Indeed, one of the biggest reasons for not selling the banks is the $600 billion of self-managed superannuation funds that still value the banks for their dividend yield.

Only a dramatic slowdown in the economy would hurt the banks but there hasn’t been one of those since 1991. Some old hands would say that means we’re due one shortly.