Bank stocks are at 35-year highs. Be wary of an air pocket

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Australian bank stocks are surging on the promise that falling interest rates will eventually drive credit growth. But the better times could take three years to arrive.

The humble ASX might not have the hype-generating AI names, but there is one industry quietly testing its own historical bounds: banks.

UBS analyst John Storey says the bank rally is not unique to Australia and bank stocks have also surged in the US, Europe and Asia. Perhaps not surprisingly, the gains here have been bigger, given the intense love affair between and their banks., and the premium local investors place on consistency of earnings.

But Storey, who has a “sell” rating on CBA, National Australia Bank, Westpac, Bendigo Bank and Bank of Queensland, and a “neutral” rating on ANZ and Macquarie, says the most likely answer is that investors are projecting forward, and counting on interest rate cuts to boost the banks over time. First, lower rates will reduce any risks from bad debts, and potentially allow the banks to reduce provisions and lift capital returns to investors. Second, and more importantly,But there’s a major problem with this thesis: Storey does not expect any improvement in credit growth, or benefit from lower provisions, for at least two years, and possibly three.

 

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