Bank shares versus bank term deposits

Investors can get after-tax returns of around 9.00% from the Big 4 banks


Australian Index Investments (Aii) believes that major Australian banks are now providing a better yield than is available from those banks’ term deposits. Australian banks have underperformed over the last 12 months and valuations now look very reasonable. Right now, PEs have fallen back for the big four banks. Australian bank stocks are now trading at prices which give Australian investors yields that are substantially higher than bank term deposit rates. Looking at the cash dividends paid in the past, and the consensus analyst forecast dividends for the coming 12 to 18 months, the relevant after tax yields for the big four banks (assuming 30% individual tax rate) are looking to beat the 9.00% mark.

x
x
“With term deposit rates paying around 5% before tax, a more attractive and tax-effective option might be using those term deposits to buy bank shares. An ETF like our Aii Financials Sector ETF, provides cost-effective access to all banks and other financial stocks offering term deposits,” said Annmaree Varelas, CEO, Australian Index Investments.
x
Australian Index Investments’ specialist sector ETFs are passively managed and designed to track the performance of the S&P/ASX sector indices. “The Aii Financials ETF (which excludes A-REITs, ASX code: FIX) invests directly in the underlying stocks that form the Financial sector index in proportion to their relative weightings. 100% of the portfolio assets of the sector held in the ETF by a separate custody account maintained by custodians, RBC Dexia, which provides an additional layer of security.
x
“FIX holds all four majors banks – being 75% of the ETF- plus 19 other financial stocks listed on the ASX,” said Ms Varelas.
x
“There is no usage of synthetic structures by Aii as we believe that they do not add real value to the investment. Most investors want to know that the ETFs they invest in hold physical assets rather than holding contract notes for swaps that they may have to rely on in the future.
c
“Investors who move from a term deposit to a pool of bank shares want to know that their investment will be there in retirement, not floating around at the whim of third parties offshore”, said Ms Varelas.
c
Aii Comment on Australian Banking Sector
x
The major Australian banks are well capitalised and, therefore, poised for organic growth. Market analysts predict that even if the ASX falls from today’s levels, bank shares are likely to outperform. The majors have all reported healthy profits that reflect a prudent approach to risk management, strong balance sheets and a resilient Australian economy.With the outlook for Australian banks remaining positive and valuations now looking quite reasonable, from a sector point of view – banks may be a reasonable investment at the moment.

 

 

You must be logged in to post or view comments.