NVDA
NVIDIA
-- 108.380 TSLA
Tesla
-- 259.160 PLTR
Palantir
-- 84.400 AMZN
Amazon
-- 190.260 AAPL
Apple
-- 222.130 Australian bank stocks soar to new peaks: How should Aussies leverage ETFs for the sector rally？
This year has been a rewarding one for Australian banks, with the ASX 200 Banks Index surging over 37% year-to-date, significantly outperforming the broader $S&P/ASX 200 (.XJO.AU)$ and reaching an all-time high.
As the largest banking stock by market capitalization on the ASX, $CommBank (CBA.AU)$'s share price hit another record high during today's session, bringing its year-to-date gain to over 48%. Other major banks, including $Westpac Banking Corp (WBC.AU)$, $National Australia Bank Ltd (NAB.AU)$, and $ANZ Group Holdings Ltd (ANZ.AU)$, also reached intraday record highs in recent sessions.
Factors contributed to the rise in bank stocks
The real estate market has demonstrated strong overall performance. Despite Australia's current high-interest-rate environment, the property market remains heated, driven by a supply-demand imbalance. According to ABS data, total housing loans have increased by 18.5% over the past year, with investor housing loans rising nearly 30%.
Cost-cutting measures implemented. Traditionally, around three-quarters of new home loans in Australia were provided through brokers. To respond to intense competition, large banks are increasingly considering offering more loans directly through digital platforms and mobile lenders. Shifting to these new methods will reduce the commissions paid to brokers, thereby improving net interest margins, a key indicator of bank profitability.
High dividend returns. Banks are often favored by investors due to their stable profitability, typically characterized by high dividends and high yield. With the global interest rate cut cycle underway, banks' dividend yields appear more attractive in this environment. However, it's important to note that if a company's stock price rises faster than its dividend payments, the yield will decrease. This explains why CBA's dividend yield (TTM) is only 2.84%.
Rise of passive investing. Peter Warnes, former Morningstar equity research head, attributes CBA's consistent record highs to its significant weighting in the S&P/ASX 200 Index. Approximately 10% of every dollar invested in ASX 200 Index funds flows into CBA shares. According to Peter Wanes,
The rise of passive investing, particularly through index-tracking ETFs, has significantly reshaped the investment landscape over the past two decades. These vehicles are largely indifferent to company fundamentals, and their influence has widened the gap between share prices and valuations based on earnings, cash flow, and book value…
Commonwealth Bank (CBA) serves as a key example. It is Australia's largest bank and a great organisation. Its place in the Australian financial system is not in question. It is the largest company listed on the ASX with market capitalisation of $240 billion and a weighting of 9.9% in the S&P/ASX 200. Therefore, it attracts substantial passive fund inflows due to its significant weighting.
It is worth mentioning that ASX 200 has been consistently reaching new highs this year and this has further strengthened investors' confidence in tracking the ASX 200 index.
What's next?
Although there has been no significant decline in Australian bank profits currently, there is an issue of overvaluation. The price-to-book (P/B) ratio is a key valuation metric used by banks, and we primarily use the P/B ratio to assess whether Australian banks are overvalued. Among all the banks, CBA currently has a P/B ratio of 3.663, which is much higher than the other banks and makes it the most expensive retail bank among developed countries. However, according to Macquaire,
Although the valuations of ASX banks are notably high, the sustained higher interest rate in Australia suggests stable earnings in the near term, with room for improvement through efficient margin and expense management. However, as rate cuts are anticipated in 2025, margin pressures are likely to increase, leading to more conservative projections for the future.
Australian banks currently face the ongoing challenge of intense competition in the mortgage market, which could also be a significant factor affecting their stock prices.
How should Aussies use ETFs to catch the banking sector rally？
If you don't want to miss out on the banking sector's rally but are concerned about buying an individual stock at an overvalued price, the following ETFs can help you track the banking sector's growth opportunities:
$VanEck Australian Banks ETF (MVB.AU)$: MVB gives investors exposure to a diversified portfolio of ASX-listed banks and financial institutions, and it aims to provide investment returns, before fees and other costs, which track the performance of the index. This ETF has risen nearly 40% this year.
$BetaShares Australian Fincls Sect ETF (QFN.AU)$: QFN aims to track the performance of an index (before fees and expenses) comprising the largest ASX-listed companies in the financial sector, including the 'Big 4' banks and insurance companies but excluding Real Estate Investment Trusts. This ETF has increased by nearly 40% this year.
Trade ETFs using moomoo in 3 easy steps!
Source: The Mortley Fool AU, Macquarie, ABS
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
Read more
Comment
Sign in to post a comment
Moomoo News AU
Moomoo News Official Account
Australian stock market news that is available at your fingertips
6007
Followers
6
Following
211K
Visitors
Follow