Bank shares attractive but diversify


Australian bank shares have been solid performers over recent decades. They've delivered an impressive income stream to investors and they've shrugged off the challenges of the GFC with an ease that was the envy of much of the world. However, between March 2015 and September 2015 they've lost 25% of their value and investors may well ask - is the miracle over?

The good news is that, following the falls of the past six months, bank dividend yields are looking more attractive. At a rate currently over 6% - even before considering the value of the franking credits - yields are now well ahead of the rapidly dwindling returns on, for example, term deposits. However, a major main caution to bear in mind is that banks are highly leveraged investments, with gearing ratios of 15 times, compared with one to two times for most other companies. Also their bad debt experience has been tracking at unusually low levels in recent years and any major problems - for example, in the housing market - could well cause a reversal in that run of good fortune.

Despite this year's sharemarket volatility, the big four banks still make up a significant percentage of the Australian sharemarket (at nearly 30% of the index). So, as with all investment, prudent diversification should be applied to your exposure to bank shares. Invest in them by all means, but don't let them dominate your overall portfolio.

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Graham Harman, senior investment strategist, Russell Investments


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