ASX stores stocks that are not the Big Four. What’s the attraction?

Half of Australians think the big banks – especially the big four of CBA, Westpac, NAB and ANZ – are the safest place to put their hard-earned money.

A survey, conducted by Mozorevealed that familiarity is the main reason people persist with big banks.

44% of respondents told Mozo that they chose to keep their savings with the Big Four because “they always have.”

This customer loyalty has translated into exceptional profits, year after year.

In FY22, CBA posted a profit of $9.673 billion, while Westpac made $3.28 billion in first-half profit.

Source: IBS

For investors, the main benefit of investing in big banks is the generous dividend yields, high postage credits and the peace of mind of owning one of the safest categories of blue chips.

To give an example, if you had invested $20,000 in ABC stock in 2010, you would have already earned over $30,000 in dividends.

But analysts have recently reassessed their valuation models in the face of rising interest rates, inflation and a cooling housing market.

Some are even increasingly turning to alternatives such as regional banks, mid caps and digital banks.

Opportunity in regional banks

Given that the Big Four own 75% of the over $2 trillion home loan market in Australia, is there any point in investing in regional or mid-cap banks?

Although small banks cannot compete on a large scale with large banks, they have their own strengths: closer relationships with customers, the ability to seek out niche markets and faster decision-making.

In Australia, consolidations over the years have left us with just three major regional and mid-cap banks – AMP (ASX: AMP), Bank of Queensland (ASX:BOQ)and Bendigo and Adelaide Bank (ASX:BEN).

(In fact, there were four just a month ago before ANZ bought Suncorp’s banking business for $4.9 billion.)

So what are the value propositions that could make these small regional banks a potentially attractive buy for investors?

M&A objective

Although the four pillar policy does not allow mergers between the big four, consolidation at the smaller end has been a main feature of the industry for decades.

It all started in the late 2000s when CBA acquired Bankwest of WA for $2.1 billion in 2018.

In the same year, St George Bank became Westpac’s subsidiary after being acquired for $18.6 billion in an all-stock deal.

Last year, Bank of Queensland acquired Melbourne-based ME Bank for $1.33 billion, and ANZ is currently awaiting regulators’ approval for the Suncorp Bank merger.

While buying a stock just because it’s a buyout target isn’t good advice, acquisitions often cause the target stock’s price to rise because the buyer will likely have to pay a market premium to attract existing shareholders.

Growth potential

More and more Australians moved away from the cosmopolitans for regional areas when the pandemic hit.

Migration from capitals to regional Australia rose 16.6% to a record high in the March quarter, according to a Commbank study.

As more people move into the regions, more banking services will be needed, which will increase business opportunities for regional banks as well as the chances of a takeover.

Lower multiples

Regional banks trade at lower P/E multiples than the Big Four, which mostly trade above 15x.

Bendigo and Adelaide Bank are trading at a multiple of 11x.

Bank of Queensland is also trading at 11x, while Tasmania’s MyState is trading at 13x.

Auswide Bank, meanwhile, is trading at 10x.

Although lower P/E ratios do not necessarily mean that a stock is undervalued, it does indicate that these stocks may potentially have some upside room.

What about digital-only neo-banks?

According to the Mozo survey, Australian borrowers are missing out on lower rates if they don’t look for better deals elsewhere.

This includes loan and savings products from neo-banks that offer online-only services.

“There is a persistent perception that online lenders do not offer the same level of security, but they are in fact covered by the same industry bodies and held to the same standards as physical lenders,” Kylie Mossdirector of Mozo, said Stockhead.

“Authorized Depository Institutions (ADIs) are covered by the Australian Government Financial Claims Guarantee Scheme.

“This means customers can have peace of mind because deposits up to $250,000 are protected in the event of an ADI failure,” she said.

Recently, there have been spectacular bankruptcies of neo banks (Xinja, Volt), and Capital of Judo is now the only pureplay digital neo-bank on the ASX.

Moss, however, believes we are entering a period of industry-wide consolidation, rather than seeing more new neo-banks emerge.

“The innovation and increased competition brought about by these neo-banks has encouraged the big banks to up their game,” Moss told Stockhead.

“This year we’ve seen some of the big four banks jump into the digital lending space, with Commbank launching Unloan and Westpac a digital mortgage application process,” says Moss.

Outlook for banking stocks

Despite the generous dividends, around $30 billion in market capitalization was wiped out by the banking sector following a strong sell-off in June.

So what’s the outlook for bank stocks?

To answer this question, we need to look at the three main drivers of a bank’s earnings.

Growth in loan volumes

Recent data from the ABS shows that mortgage lending in Australia is indeed down due to higher rates.

While investment real estate lending has increased, homeowner lending is down about 10% from a year earlier.


Despite these trends, the IOC of Climate investment management, Will Riggallbelieves that banks’ loan portfolios will continue to grow thanks to business lending.

“We are positive about the outlook for the Australian economy…and this reinforces our view that GDP growth will be funded by credit growth,” Riggall said.

“We are seeing an acceleration in the growth of business loan volumes as businesses invest after a period of weak capital spending,” he said.

Net interest margin

Net interest margin (NIM) is the difference between what a bank earns in interest on loans and the amount it pays in interest on deposits.

Over the past year, Westpac has seen a 22bp decline on its NIM, CBA has seen an 18bp contraction, while NAB and ANZ have also reported NIM cuts.

So what does a cycle of higher interest rates mean for the NIM of banks?

“While higher interest rates are not what a mortgage holder wants to see, it does have a positive impact on a bank’s NIM and is therefore positive for the bank’s earnings and dividends” , Riggall said.

Bad debts

With slowing economic growth, some debts may not be fully repaid.

To account for this risk, banks apply a Bad Debt Charge (BDD) as an estimate of a percentage of loans that will not be repaid.

Surprisingly, things aren’t as bad as they seem; Westpac, for example, saw its bad debts fall to a multi-year low in the June quarter.

“As we now enter a cycle of rising rates, the risk is that bad debts will increase,” Riggall conceded.

“But for now, we believe the risk of increased NPLs and NPLs is finely balanced, supporting the benefits of strong credit growth and higher NIMs for the Australian banking sector,” he said. he adds.

Non-Big Four Banking Stocks on the ASX

Besides the three big mid-sized banks of Bank of Queensland, Bendigo and Adelaide Bank and AMP, here are some of the smaller banks listed on the ASX:

MyState Bank is headquartered in Hobart and just delivered its second highest annual NPAT with a record $32 million.

The bank has a $7 billion home loan portfolio with $6 billion in customer deposits.

A big part of the bank’s strategy is to grow its digital offering.

Auswide Bank (ASX:ABA)

Bundaberg-based Auswide has a loan book of $3.8 billion with a customer deposit base of $3.05 billion.

The bank is benefiting from Queensland’s population growth, which is higher than national averages.

In FY22, Auswide achieved a net NPAT profit of $26 million.

Perth-based BNK has a loan portfolio of $984, with customer deposits of $965 million.

The bank recently completed a strategic review that will pivot the bank into higher-margin SME lending business.

BNK delivered FY22 NPAT of $60 million, an increase of 956% over the previous year.

Judo has a $6 billion loan portfolio backed by $4.6 billion in term deposits and $2 billion in warehouse commitments.

Unlike traditional brick and mortar banks, Judo was able to increase its NIM in FY22 (by 20 basis points).

Judo reported a net profit of $15.6 million in its first annual results, beating IPO expectations.

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Keith P. Plain