Why the time to own Australia's Big Four banks is not now (and where you should invest instead)

When a fund manager points out that even the star of the ‘Big Four Banks’, Commonwealth Bank (ASX: CBA), has failed to keep up with inflation in the dividend per share returns it offers investors, you sit up.

After all, the Australian Big Four have formed the heart of many an investor's portfolio for decades - solid institutions that have offered blockbuster profits and those ever-popular franked dividends.

But, while Lazard Asset Management’s Aaron Binsted believes we’re looking at harder times for the banks, it’s not necessarily a trigger to sell out and run for the hills.

“We think that this is a time to be, at a minimum, very underweight. There will be a time when you’ll want to own more of them, but the time is not now,” says Binsted.

After all, the banks continue to generate significant profits and returns – but are not necessarily worth the valuations they are sitting at currently.

Binsted is still seeing potential in a different area of the financials sector however, and in this episode of The Pitch, he shares where he sees opportunity and three companies he has invested in.

Please note, this interview was filmed on Wednesday 8 May 2024.

Edited transcript

Australian banks have traditionally been a stalwart of Australian portfolios. Is the time for those blockbuster profits and dividends behind us?

We think they will remain a large part of the earnings base and dividend base of the Australian market for some time. However, when you go back and look at the history, we don't think they are necessarily a great way to source income growth over the last decade. As a sector, it's given no dividend per share growth over a decade. Even the star of that group, Commonwealth Bank (ASX: CBA) has not kept up with inflation. 

While they can have a role, we think you want to be very different in terms of your weights for the banks. Unless your goal is to track the index, which is not what we're trying to do. We think there are much better places to source that income growth for the future.

What does the changing fortunes of the banks mean for the broader economy?

I don't think the economic impacts are necessarily that high. We know that returns for the banking system have been coming down over time through competition and regulation. It's the more traditional things - GDP growth, interest rates, inflation, the affordability crisis and the like - that we think can be much more material for the economy.

We think the banks are going to be relatively stable, relatively low growth, and to be honest, relatively unexciting.

On that note, is now the time to sell the Australian banks or would you continue to hold them?

They are looking very punchy in terms of historic valuation metrics, both relative to their own history and relative to offshore peers at a time when their returns are significantly lower than they have been historically. 

We think that this is a time to be, at a minimum, very underweight. There will be a time when you’ll want to own more of them, but the time is not now.

You are currently underweight financials in your portfolio. Where do you see the key financials opportunities?

We much prefer the insurers and I can contrast that with what I mentioned about the banks - no dividend per share growth over a decade. The ones we really like are just the common big ones. Suncorp (ASX: SUN), IAG (ASX: IAG) and QBE (ASX: QBE). 

We've had three years of earnings upgrades for those three stocks. We think the earnings momentum is going to continue in the near term. IAG and Suncorp are the more premium domestic players and on valuation ratios broadly similar to the banks with a much better earnings outlook. QBE also has strong earnings, and momentum trades at big discounts. We think that is a much better proposition relative to the big four banks.

Defence is the best form of attack

Aaron's Fund has historically provided capital growth and income that is consistent with the Index with less than half the drawdown, compared to the Index in negative markets. Find out more here.

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