Friday, November 10, 2006

Australia's cartel!

Ok, I must be thinking about my investments at the moment - this is no doubt related to the ASX's recent outperformance in October and the fact that I am now a couple percentage points below an 'ideal' 50% gearing ratio.

So, prompted by Macquarie Bank's research changing its bank preference from ANZ to WBC, I started thinking whether I should further invest in Australia banks. There are four major banks in Australia and, I believe, there is currently legislation maintaining the domicility of these banks to be Australian (i.e. they cannot be overtaken by larger, more competitive offshore companies). This leads to a cartel-like core distribution of bank services in Australia. Of note, most of the Australia banks have provided capital returns of 15%-20% over the last 10 years; ironically, it is better to invest in a bank's shares than in its core savings accounts!

I digress, so ANZ coming off a year of 28% capital return is downgraded and WBC is now the preferred pick of the banking sector. So before I invest, what do I need to consider? Is WBC affected by its exposure to the downturn (and potentially further decline) of Sydney real estate? what will the impact of increased rates be? and on the positive, WBC is at an 11% discount to its peers (I believe its PE ratio is mid-14s) and that the CEO was rather bullish in sentiment. On top of that the 5% dividend yield does look attractive. Decisions, decisions ...

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