Wilsons is remaining underweight on the major banks despite their shares trading near book value, saying it had reservations around their ability to grow earnings.
A fall in bank share prices through August and September has seen the majors hand back around half of their gains through May and June however even as basement prices, Wilsons said it was struggling to find conviction.
“While we acknowledge valuation appeal – both relative and absolute – we remain guarded around adopting a more positive stance towards the banks in the Wilsons Australian Equity Focus List – where we remain underweight,” said Wilsons analysts.
“The catalysts and conditions which could lead to outperformance are not yet in place. Cheap valuations themselves may be a catalyst – somewhat like the late May/June rally – but operating and regulatory conditions are not yet favourable for a sustainable re-rating of the banks. In the absence of an acceleration in core earnings, we continue to only see low single-digit earnings growth on offer over the medium-term.”
The broker said it was unclear what would drive a re-rate, or even a sustainable re-rate, in the bank share prices.
“There are a number of factors which could drive a share price re-rate in the coming months – progress on vaccine development and an accelerated economic reopening – though much like May, it will be difficult to predict the timing/impact of these potential factors,” the analysts said.
“With current bank share prices at around book value, the market is heavily discounting any sort of earnings improvement over the medium-term. While earnings are depressed at current, a return to a more normal operating environment along with less regulatory focus still leaves the banks in a dominant industry position.
“For patient, value oriented investors, current pricing holds appeal.”
Wilsons said CBA and ANZ were its preferences of the majors, but for the time being it saw better opportunities elsewhere.