Buy Hold Sell: Best of the Big Four and 2 fundie favourites

Love them or hate them, you really have to hate the banks. Right? Well - maybe not so fast. After all Aussie investors love them, and why not? They've been a trusty source of dividends for years. And, last year, the banks endeared themselves to the broader public when they allowed people to pause loans and mortgage repayments, thus providing a life raft during peak COVID. 

Now, having recovered by an average of nearly 71% from their COVID-lows, the Big Four are flying higher on our cashed-up country's improving economic outlook. In fact, KPMG found the Australian banks have recently reported a combined cash profit after tax of $13.8 billion, up 62.3% compared to the same time last year. 

The Big Four continued to strengthen their balance sheets during the half-year, lifting their CET1 ratios by 105 bps to 12.4% - the strongest capitalisation the banks have boasted in decades, KPMG reported. 

So, in this episode of Buy Hold Sell, Livewire Markets' James Marlay sits down with Wilson Asset Management's Matthew Haupt and Firetrail Investments' Scott Olsson to put the banks head to head. Plus, they each share one financial sector stock that has caught their attention. 

Note: You can watch, read or listen to the discussion below. This episode was filmed on 12 May 2021.

Edited Transcript

James Marlay: Welcome to Buy Hold Sell brought to you by Livewire Markets. My name is James Marlay and I'm joined by Matthew Haupt from Wilson Asset Management and Scott Olsson from Firetrail Investments. And today, we are going to rank the banks. But before we do, find out what the boys think about the Big Four in Australia, I've got a bit of trivia for you and for them. So, over the year to date, Matt, which of the banks has been the best and worst performer year to date?

Matthew Haupt: Geez. I'm going to go best: CBA. Worst: Westpac.

James Marlay: All right. Scott, your turn.

Scott Olsson: I'm actually going to flip those two. I think best: Westpac. And worst: CBA.

James Marlay: Well, Scott, one point for you, ding, ding. Over a three year, same question. Best and worst over a three year period?

Matthew Haupt: I'm just going to stick with the same.

James Marlay: Yep. Well, if you were to flip it, that's absolutely right.

Scott Olsson: Yeah. I think the same. Yeah. CBA the best, Westpac the worst.

James Marlay: Yeah, interesting. CBA up 34% over the past three years. And in fact, it's the only one of the big four banks that is in the black, the rest of them all still in negative territory on the capital front. 

So, let's find out where they're going to go going forward. That's the past. Matt, number one in the banks, if you had to pick the number one pick what would it be and why?

Best of the Big Four: National Australia Bank (ASX:NAB)

Matthew Haupt (BUY): It'd be National Australia Bank. Done a lot of work in the background, pulled out costs, reduced products, straight-through processing. All that hard work has been done and we're starting to see the signs of that hard work coming through the results. Probably in the last month or two of the result, a very encouraging sign. So, NAB for me is a clear winner in the Aussie banks.

James Marlay: Okay. Scott, you're number one pick out of the big four. Can you give me the pitch and then tell me why you like it?

Scott Olsson (BUY): Sure. It's also NAB for the reasons that Matt outlined, but alongside that as well, I think what they're doing on costs, they're not short-terming the business. I think they're investing enough alongside pulling out costs. So, that should enable them to take advantage of some revenue opportunities. And the business environment finally looks like there might be a bit of growth coming out of that, which is where NAB really plays and it does its best work.

Worst of the Big Four: Westpac Banking Corporation (ASX:WBC)

James Marlay: Okay. We're going to flip it around. What's your least favourite out of the Big Four banks and what is it that's put it on the nose?

Scott Olsson (SELL): It's Westpac for me. Its big cost programme is out there. I think they're doing the right things, but very difficult to remediate your business and then streamline your business while you've got competitors that are kind of going at 100 miles an hour. CBA is still investing for growth. I think if they achieve that number, there's a bit of revenue pressure that will come with it and I don't think that is really in market expectations at the moment. So, it's Westpac for us.

James Marlay: Okay. Same question for you, Matt. What's the laggard in the banking sector? What's the one that doesn't set you on fire?

Matthew Haupt (SELL): Again, it's Westpac. Like Scott mentioned, the cost target and the amount of disruption that will cause within the organisation. I just don't see how that doesn't hit revenue opportunities and the talent within the organisation. To stay motivated, that's incredibly tough I think that journey. If they get there, full credit, but again, coming out to announce a big cost out is incredibly unsettling.

James Marlay: If we're to step outside of the banking sector, you give us your best and worst from the big four. If you had a number one pick more broadly in a sector that represents about 30% of the big end of the market, what's a top idea in the financial sector?

Challenger (ASX:CGF)

Matthew Haupt (BUY): The one I like at the moment is Challenger. So, Challenger is trading at a discount to book value. A few credibility issues. That had guidance out in the market and then missed that badly through some events they say is external to them. But at the moment, just discount the book, and that event, which caused the downgrade, I think could unwind. And that will come off the back of yield curve control of the RBA all the way from that three-year yield curve control. And you get some normality back in credit markets and credit spreads. So, that could actually turn into a tailwind, which was a headwind. And then the funds management business, ideally it would be spun out into a new vehicle or realise value there. So, I think Challenger looks incredibly good value at this point.

James Marlay:
Okay. Scott, same question for you. Cast your eyes a little bit broader beyond the big banks. You've got something nice in the financials?

Virgin Money UK (ASX:VUK)

Scott Olsson (BUY): It's beyond the big banks, but it's still a bank. Virgin Money UK. Obviously, a UK bank and I think when you're buying Virgin Money, you're really getting the thematics that are driving the Aussie banks at the moment. You're getting, unwind of COVID provisions, economic recovery. And one differentiator is, where I think margins are going down from here for the major banks, I think they are going up for Virgin. They've just increased their guidance. Take all that into account, you're getting it at a 30% discount to tangible book. You're paying 60% premium for the Aussie majors. So, I'd much rather be playing overseas at the moment in the banks.

James Marlay: Okay, great. Well, our two guests have given you their best and worst from the big banks. They've also come to the table with a bit of value in the financial sector. And remember, if you enjoyed that episode, hit subscribe on the YouTube channel. We're updating Livewire markets' YouTube channel with fresh videos every week.

What is your hidden gem within the financial sector? 

Scott's favourite pick in the financial sector is Virgin Money UK, while Matt believes there to be plenty of upside ahead for Challenger. But what do you think? Let us know what financial stock you are loving in the comments section below.