The sharemarket valuations of the big banks are looking attractive after the recent sell-off and the usual buying that occurs before their dividend payouts could drive their share prices higher, Macquarie says.
The S&P/ASX 200 banks index tumbled to its lowest point since July 2013 at the end of a dismal third quarter for the sharemarket. The index has fallen 20 per cent since the market rout began in April, fuelled by volatility on macro concerns and industry-specific capital raising requirements directed by the Australian Prudential Regulatory Authority.
"With the sell-off that began in April the banks are currently trading at valuations not seen in years," Macquarie Wealth Management wrote in a research note.
"While the market is primarily being driven by macro concerns at the moment, we view the upcoming dividends as a catalyst to drive outperformance as the dividends focus the market on the attractive valuations these companies are currently trading at."
Westpac Banking Corporation, National Australia Bank, ANZ Banking Group and Bank of Queensland are all going ex-dividend in November and Macquarie said the buying in the run up could push their share price valuations back to more normal levels relative to the market. Commonwealth Bank of Australia went ex-dividend in August.
Higher-yielding stocks, including the big banks and real estate investment trusts, tended to outperform the market in the lead-up to their ex-dividend trading dates, Macquarie said, because investors priced in the dividend before the ex-dividend date.
On average, the banks outperformed the market by 2 to 4 per cent in the weeks leading up to their ex-dividend date and then underperformed after that date, Macquarie said.
Run-up shifting earlier
"We also observe the run-up has been shifting earlier for the banks, with the peak often occurring well before the ex-date, with the banks then selling off in the final weeks just before their ex-date."
The banks index fell to a low of 7620.8 on September 29, the day the sharemarket shed 4 per cent to plummet to less than 5000 for the first time in two years, but since then it has risen more than 5 per cent.
"The recent sell-off in the banks presents substantial opportunity," Macquarie said.
ANZ was the most heavily sold-off stock in August, and at the end of the third quarter was trading at a multiple of 10.2 times forward earnings, with a yield of 9.7 per cent. The last time it was trading this cheaply was in January 2013.
"We believe the upcoming dividend will act as a catalyst for investors to trade on the attractive valuations and as a result we expect ANZ to outperform in the lead-up to its ex-date," Macquarie said.
Westpac was trading at a forward price-earnings ratio of 11.6 times earnings, with an earnings yield of 8.6 per cent. The last time Westpac traded at its September 30 price was in July 2013.
"With the dividend around the corner, our view is the market will become increasingly aware of these attractive valuations and we will see the run-up commence late and supported by a valuation tailwind," Macquarie said.
National Australia Bank's valuation is at its cheapest since October 2014. It is trading at a forward price-earnings ratio of 11 times, with an earnings yield of 8.8 per cent. Macquarie also expects this attractive valuation to lead NAB to outperform the market in the lead-up to its dividend.
