Over the last month, FTSE +6.95%, Hang Seng +5.5%, Dow Jones +5%, Shanghai +4.2%, S&P500 +3.9%, ASX 200 +2.8%, Nikkie +2.7%, NASDAQ +1.8%, AUD/USD +1.7% 0.72, Iron Ore -8.8% US$52, Brent Oil -2.5% US$47.9

Banks reporting season is fast approaching

Westpac results were pre-released with $3.5 billion capital raising while ANZ (29 October) and NAB (16 November) will shortly report their full-year results. Macquarie Group also reports its 1H result on 30 October.

Our view on the banks

The major banks have recently weakened due to:

1) capital raising activity;

2) concern on bad debts; and

3) the falling A$ deterring international investors.

The major banks are now trading in-line with or below their long-run average PE multiples. The AUD has also found some support. Current prices are more expensive than they appear if the bad debt cycle – currently at very low levels – turns sharply for the worse, which arguably the market is partially pricing in. Our forecast assumes a gradual normalisation in bad debts, rather than a spike and that buying the banks on their dips should continue to prove a fruitful strategy.

We prefer ANZ as clearly the cheapest bank, trading on a 10.8x PE multiple, well below its long-term average of 11.7x.

Buying 3 dividends in 13 months

By investing now, investors have the opportunity to earn up to a 15% gross yield in select banks over the next 13 months assuming that capital values remain stable. ANZ is both the most attractive yielder (15%) and the most attractive on value grounds (as above). The yields for NAB and WBC also look attractive in the 13% range.

Results and rates differentials are potential catalysts

The difference in the yield of Australian equities above the yield of risk-free assets (Australian 10-year bonds) is testing its maximum historical spread, suggesting that equities are relatively cheap. The likelihood that the US Fed will soon raise interest rates, coupled with the potential for the RBA to cut rates into 2016, implies that high- yield equities will remain well supported while domestic rates remain depressed.

Our quantitative analysis also shows that over the last 20 years, the share prices of the major banks have appreciated more than 70% of the time in the 2 months prior to their results, with the average positive movement being ~10%. Equally supportive is that we found that it takes an average of 3-4 weeks for the banks to recover the size of the dividend paid in their price (ex-franking).

This report is provided for general information purposes only and is not intended as an offer to enter into any transaction. This information contained in it is not necessarily complete and its accuracy cannot be guaranteed. We have prepared this presentation without consideration of the investment objectives, financial situation or particular needs of any individual investor.