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Why Mid March is Not The Time to Sell Aussie Banks

There has been much coverage in the press recently about how international investment banks are downgrading Australian banks. Their reasons include rising unemployment in Australia, increasing risk of recession, bubble like share prices, slowing profit growth, depressed business conditions; and the list goes on. While it is clear that there are potentially negative headwinds approaching for Australian banks, and as a consequence their share prices, the question is whether these downgrades are a case of the early bird catching the worm, or more haste, less speed. I’m inclined towards the latter; the investment banks appear to have jumped the gun. I wouldn’t sell Aussie banks right now* so let’s explore why.

First let’s check share valuations based on the banks’ most recently announced financial results…

Valuation

The following valuations are as at 19th March 2015:

Ticker Bank Edge % Investment Horizon (Years) Valueness
ANZ Australian and New Zealand Bank -0.8% 5.5 Poor-Value
CBA Commonwealth Bank of Australia -24.7% 6.8 Overvalued
NAB National Australia Bank -11.8% 6.5 Overvalued
WBC Westpac Banking Corporation -17.4% 6.4 Overvalued

The banks are all trading with a negative edge i.e., intrinsic value per share is less than the current share price. The investment horizon indicator also agrees that they are overvalued. However, while the shares of all four banks shares appear to be overvalued in the market in terms of edge and investment horizon, they are not extremely so. Valuations alone would not cause me to sell right now especially given where we are in terms of seasonality.

Seasonality

Australia’s big four banks exhibit some of the most consistent seasonal characteristics of any shares on the market. So, let’s examine the banks from a seasonal perspective. Mean annual profile charts for each bank are shown below.

Australian and New Zealand Bank (ANZ)

ANZ Seasonality

ANZ Seasonality

Commonwealth Bank of Australia (CBA)

CBA Seasonality

CBA Seasonality

National Australia Bank (NAB)

NAB Seasonality

NAB Seasonality

Westpac Banking Corporation (WBC)

WBC Seasonality

WBC Seasonality

We can see from the charts that the period from early to mid March through to the end of April is seasonally a very strong period for every one of the banks. On average the most profitable six week period of the year for each bank starts in mid March. The table below shows the average historical performance if a position is taken on ‘Entry Date’ and held for six weeks. For more information see How To Use Seasonal Projections.

Ticker Entry Date 6 Wk Change %
ANZ 14th March 7.95%
CBA 13th March 6.68%
NAB 13th March 6.70%
WBC 15th March 6.19%

With a historical average of around a seven percent move higher over the six week period starting mid March the performance of the banks during this time is remarkable. Selling existing bank holdings at this time is likely to result in a sizeable opportunity cost and short selling would likely result in losses.

A possible explanation for this seasonal behaviour is that it is due to the timing of ANZ, NAB, and Westpac’s financial reporting periods. Their reporting period ends on 31st March and they announce their half yearly results and commence trading ex-dividend around the end of April or early May.

The majority of listed companies in Australia have a reporting period ending 31st December and announce their financial results in February. By mid March they are trading ex-dividend.

Dividends are normally paid around the end of March meaning there is a mountain of cash looking for a home in the market. Commonwealth Bank and Telstra alone will pay over five billion dollars in dividends during this period.

The remaining banks, ANZ, NAB, and Westpac, with their upcoming dividends are the obvious next choice for somewhere to put this cash to work thus sending their share prices higher as their results announcement dates approach.

…and for that reason now is not the time to sell Aussie banks.

Moving forward we can see from the above seasonality charts there is likely to be weakness in the banks in May after they have announced their results and commence trading ex-dividend. Is that the time to ‘Sell in May and go away’?

Note: Seasonal market behaviour can be overwhelmed by other market influences at any time and historical performance is no guarantee that any specific market behaviour will occur again at any time in the future. Please see the following caveats.

*Please note that this post was published on 19th March 2015 and only considers seasonal factors and valuations applicable at that time.

*This article is for educational and interest purposes only and is not advice or a recommendation to buy or sell any security. Readers should seek the advice of a qualified financial professional before investing in the markets.

**Image Copyright: 123RF Stock Photo

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