Aussie bank shares “too expensive to own” as mum and dad investors dump ANZ, NAB, WBC & CBA

After the market closed on 13 March, major broker Macquarie released a research report titled "Australian Banks: This time it's different.” In the report, they reiterated their view that ASX bank stocks were priced for perfection as they were “trading at peak multiples without a clear fundamental reason.”

Geez, tell us what you really think Macquarie!

They went on to retain an UNDERWEIGHT rating on the entire Aussie banking sector, and then downgraded their ratings on three of the Big 4:

• ANZ downgraded to UNDERPERFORM from neutral

• WBC downgraded to UNDERPERFORM from outperform

• CBA downgraded to UNDERPERFORM from neutral

As for the rest, Macquarie already had Commonwealth Bank of Australia (ASX: CBA), Bendigo and Adelaide Bank (ASX: BEN), Bank of Queensland (ASX: BOQ) and Judo Capital Holdings (ASX: JDO) rates as UNDERPERFORM.

The response in the market to Macquarie’s unanimous sector bearishness was swift and severe

The response in the market to Macquarie’s unanimous sector bearish research report was swift. On March 14, the banking sector was down an average of 2.5%, but ANZ Group (ASX: ANZ) (-3.76%), Westpac Banking Corporation (ASX: WBC) (-3.75%), and National Australia Bank (ASX: NAB) (-2.76%) each suffered more severe declines.

As you can see from the above chart, the fall ended what was a spectacular run of performance in ANZ’s chart. CBA, NAB, and WBC each experienced a similar run in their share prices since November, and none have recouped those 14 March losses yet.

Institutions have been buying

In their latest ASX banking sector report released after market close yesterday titled “Money talks – Retail profit taking”, Macquarie considers recent moves in ASX bank share prices and the contributing factors behind the recent declines.

Macquarie cites data from bank registries and broker activity, noting that much of the banks' share price outperformance in the last three months of 2023 could be attributed to local institutional investors who were “closing their underweight positions”.

By this, Macquarie implies that local fund managers had likely taken a tactical bearish stance on Aussie banks earlier in the year as markets anticipated a hard landing in the domestic property market and accompanying credit quality issues. As this scenario hasn’t played out, they were left underweight the sector towards the end of 2023 and had to rectify the situation.

As for the bank sector outperformance this year, Macquarie cites anecdotal evidence that “foreign investors have been more active recently”. The broker notes that CBA was particularly targeted by “both domestic and offshore institutional investors”.

Mum and dad investors are taking profits

Macquarie notes that one group of investors, who have traditionally been major supporters of Aussie banks, has been largely absent from the buy side over the past six months.

Whilst individually your typical retail investor is a mere drop in the ocean of the market, when it comes to Australian banks, they punch well above their weight. Macquarie suggests retail investors represent around 40-50% of banks’ share registries. This means a trend of selling among retail investors can have an outsized impact.

Share register - retail proportion. Source: Company data, Macquarie Research, March 2024

Macquarie cites activity at retail stockbrokers over the period and confirms Retail investors were indeed net sellers of Aussie banking stocks. This is “consistent with previous bank share-price rallies”, notes Macquarie. The selling from retail investors was most pronounced in WBC, followed by ANZ, and then NAB.

Banks net buying by retail investors. Source FactSet, IRESS, Macquarie Research, March 2024

See ya later, shorts!

The other key finding of Macquarie’s research was the activity among short sellers. Short sellers usually get a bad rap among Aussie investors who believe the shorts are responsible for pushing down the prices of investors’ favourite stocks. The flip side of this equation is usually understated or forgotten – when the shorts have to get out, they can become major buyers of stocks.

Majors’ short interest %. Source: ASIC, Macquarie Research, March 2024

And buy Aussie banks the shorts did. For the same reasons many institutional investors were underweight the bank sector, many hedge funds were short. Macquarie notes short interest has “broadly fallen across the sector, except for small rises at BEN and JDO”.

Staying the course

All the research presented we’ve discussed so far is backward-looking. What does Macquarie think about Aussie banking stocks going forward? Do they think the recent correction in share prices has created a buying opportunity?

Nope. Macquarie is staying the course. Their research suggests the sector's outperformance since the middle of last year was “without clear fundamental reasons”, and instead “appears to be driven more by technical factors than fundamental ones.”

As a result, they have reiterated their UNDERWEIGHT rating for the entire sector, noting, “we see limited scope for positive surprise or fundamental reasons for a structural re-rating”. Australian banks remain “too expensive to own”, Macquarie concludes.

The broker’s current ratings and target prices across the sector are listed below. Let’s say WBC is their least-overvalued pick!

Macquarie ASX Banks rating and 12-month price target table. Source: Macquarie Research