Bank reporting season delivered what we were looking for across three key areas: 1) high single-digit (underlying) earnings growth and dividend beats; 2) falling bad debt provisions ahead of the market; and 3) strong capital levels – suggesting capital management is not too far away.
Bank capital levels are approaching 13% at core equity tier one level, well ahead of regulatory minimums – implying it’s only a matter of time before banks begin returning this capital. This could happen as early as full-year results in November.
The quantum of capital return is likely to significant. We estimate a surplus capital range of 5.5-8.5% of market capitalisation, or almost $A30bn for the sector. In this note we explore why investors should be overweight banks.
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John is a leading investment strategist with 20 years experience.