How Australian banks are doing since the outbreak of COVID-19

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The profitability of Australia's banks has been falling since the GFC, according to the RBA's September report on the Australian economy and financial markets.

The research looks at the return on shareholder equity after tax and minority interests from just prior to the 1987 stock market crash until now.

According to the RBA, Australia's major banks peaked at 20% profitability before falling away after the GFC to now be under 10%, which is below the level prior to the 1987 crash.

big four banks performance covid

To put this into context, historically over the last 30 years, the bank's profitability has floated a few per cent above or below 15%, which has underpinned the growth in the share price of the big four banks over this time.

Following the GFC, Australia's banks rose strongly until 2015 and during that time profitability stayed strong. However, changes to the industry, the royal commission into banking and new regulation has placed challenges on the industry, which has caused not only the share price of banks to fall but also their profitability.

Eventually things stop falling and start to rise and the big four banks have moved up since their COVID lows in March of last year with CBA leading the charge moving to a new all-time high. That said Westpac, NAB and ANZ are still well below their 2015 highs. So, does this spell opportunity for those looking for good long-term growth?

As the Australian economy opens up again and gets back to business as usual, I believe banking profits will start to rise. However, other Australian banks may not be so lucky as their profits have been eroding since the early 1990s and have been below the big four since prior to the GFC. That said, contrary to the big four, their current profitability is slightly above where it was after the GFC, so it is worth keeping an eye on these stocks.

Over the long term, I believe there is good value in the Australian financial sector and our banks will get back to doing what they do best, which is to make money for their shareholders.

The best and worst performing sectors this week

The best performing sectors include Energy up more than 4% followed by Healthcare up more than 1% and Financials up just under 1%. The worst performing sectors include Consumer Staples down under 1% followed by Industrials and Consumer Discretionary, which are both just in the red so far this week.

The best performers in the ASX/S&P top 100 stocks include Altium up more than 12% followed by Lynas Rare Earths and Woodside, which are both up more than 9%. The worst performing stocks include Brambles down more than 9% followed by Fortescue Metals and AMP, which are both down more than 5%.

What's next for the Australian share market

The Australian stock market moved up this week although it has been far from convincing rising under 1% so far. This financial year the All Ordinaries Index is up slightly more than 2% and it is now 4 weeks since it achieved its all-time high of 7902. The calendar year to date figures look better with the All Ordinaries Index up 13% and I don't expect the return to be any better by the end of this year.

The slight move up on the Australian stock market this week has not changed my opinion that the probability has swung towards the market being more bearish in the short term. If this is correct, I expect the next low to occur sometime in the next two to four weeks with the market likely to fall below 7200 points. This is just normal market behaviour, so I don't recommend investors panic and sell their stocks but rather get ready to buy in November, as there are many stocks presenting some good opportunities for growth into 2022.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.