Here's why you might (or might not) want to buy shares in a bank

Thursday, 26 September 2019

You don't just have to put your money in a bank account - you can buy a slice of the bank itself.

Banks' profits are often bemoaned as big corporates making money out of New Zealanders.

But what if you could make money out of the banks?

Interest rates are low, so you won't do it by putting money into a term deposit or savings account.

But you could buy a slice of one of them by investing in their shares.

* Fixed-term borrowers only get fraction of official cash rate cut

* Mortgage rates fall on suggestion official cash rate could drop**

In Australia, shares in the big four banks are a common investment for retail investors. They are less favoured in New Zealand.

Here's what you need to know.

WHERE CAN YOU GET THEM

The big four banks are all listed on the Australian stock exchange.

Only ANZ and Westpac are listed on the New Zealand market.

On Thursday, ANZ was listed at $30.65 a share on the NZX and Westpac $32.20 but you could buy part of a share through Sharesies.

New Zealand investors can access the parent companies of BNZ and ASB from New Zealand, even though they are not listed here.

ASB Securities offers a DIY option for the Australian market, and stock brokers can also help. There are no minimum holding requirements on the ASX but CommSec, which ASB trades through, requires a minimum investment amount of approximately A$500 ($538).

If you're in a balanced or growth KiwiSaver fund, you probably already have exposure to bank shares through that.

SHARE PRICES

Bank share prices took a bit of a hit this year as regulators cracked down on both sides of the Tasman.

In the New Zealand market, ANZ shares are up 20c compared to a year ago but are $4 higher than they were six months ago.

Westpac's shares have followed a similar pattern, up $1.85 over the year but $5.36 over six months.

DIVIDENDS

In Australia, lots of people favour banks because they deliver good dividends – that's the money you are paid every year for holding an investment.

Sam Trethewey, a portfolio manager at Milford Asset Management, said imputation credits in Australia boosted dividends close to 8 per cent a year for investors there.

Those credits do not apply in New Zealand and dividends are usually around 5.5 per cent.

Trethewey said that was similar to the dividend offered by the power gentailers but without the level of risk that banks hold. He said it had been noticeable that investment money was flowing into those dividend stocks as term deposit rates fell.

Brad Olsen, an economist at Infometrics, said there were good reasons to invest in banks.

Profits had been strong in recent years, which made them an attractive investment option. Many of the big four have posted record profit. The sector made a combined $10 billion in the year to June.

'What's more, the average return on equity for the four big banks over the year to June 2019 was over 15 per cent. Both of these insights show that banks' performances of late have been strong, making them an attractive investment option.

'New Zealanders continue to hold property as their preferred asset class, meaning that the prominence and importance of banks in New Zealand will persist, highlighting the attractiveness of bank investment. It's important to note that softer economic growth and/or a softening in the housing market might take the shine off banking over the medium term, but with bank profits high and returns good, I'd expect bank investment to remain an alluring option.'

OUTLOOK

But others warned that the good times for banks might not last.

New rules are being imposed on both sides of the Tasman, including the Reserve Bank of New Zealand's proposals for them to be forced to hold more capital against their lending.

'If the Reserve Bank's capital holding requirements do come to fruition, it's likely that profits and shareholder returns will be softer than at current, yet increased capital holding requirements also make investing in a bank arguably safer (if the holding requirements mean banks are less likely to fail),' Olsen said.

Trethewey said banks were 'punching bags' for Australian politicians, which created uncertainty.

In New Zealand, they will soon have to work through a conduct licensing regime.

Banks are also closely tied to the housing market. Mark Lister, of Craigs Investment Partners said that made his firm hesitant to invest heavily. 'A booming housing market is good for banks and we don't see that… We think the outlook for their business continue to be a bit challenging.'

Lower interest rates would be a headwind, he said.