Last month, Warren Buffett's
In an interview with Fairfax Media, Mr. Buffett reiterated his long-term commitment to Australia, saying "If you come back in two or three years, you will find we have got four or five Australian equities." Furthermore, Mr. Buffett explicitly mentioned his interest in Australian banks, saying, "Banking is something I have looked at. I am comfortable with banks. We have some big positions in U.S. banks. I will certainly be looking at the banks. In looking at banks, I would say there is a good chance that five years from now, we will have bought one or more positions in Australia banks."
In U.S. dollar terms, Australian banks have under performed their global peers over the last 12 months due to: a) the weakness in the Australian dollar, b) investors' concerns over higher capital requirements mandated by the country's banking regulator, and c) general fears of a weakening Australian housing market.
I assert that the Australia banking sector remains attractive for global investors. In particular, I like Westpac Bank (WBK). WBK has a market capitalization of $79 billion. The stock is down by 17% over the last 12 months, but I believe it is poised to recover and has the potential to double over the next several years for the following reasons.
The $59 Billion Philanthropist, chronicling 50 years of Buffett's investment savvy and unprecedented giving, is available now for download.
Australia's economic growth will surprise on the upside. In the long-run, the Australian economic growth rate will surpass that of nearly all major, developed countries. Firstly, its population growth rate of 1.7% is more than doubled that of the U.S., and is more than six times that of the Euro Zone. Australia's robust population growth is due to its strong immigration program, which mostly grants visas or citizenship statuses to highly skilled workers. Moreover, according to McKinsey & Company, Australia has one of the lowest debt-to-GDP ratios in the world for a developed country--lower than that of the U.S., Canada, and South Korea, and just higher than that of Germany. While Australia's ecnomy is currently suffering from a decline in commodity (copper, iron ore, and LNG) prices, I believe the country will bounce back as the Chinese-led Asian Infrastructure Investment Bank jump starts a host of infrastructure construction projects in the Emerging Asia region (which I discussed in March 23, 2015 article "Investing In The Potential of New Asian Infrastructure Investment Bank"), and as China begins to invest heavily into the construction of a nationwide "Smart Grid" by 2020. Both endeavors will serve to increase the demand for copper and iron ore significantly over the next several years.
WBK is positioned well to take advantage of Australia's economic growth. WBK is one of the nation's four dominant banks that operates largely in an oligopolistic market. WBK offers a comprehensive suite of financial services, including corporate banking, small business banking, retail banking, as well as wealth management. Because of the structure of the nation's financial services sector (the country's four largest banks control more than 90% of its business and consumer lending market), WBK has a strong "moat," protecting the bank through high barriers to entry and allowing it significant pricing power and strong profit margins.
WBK has strong fundamentals, along with a high dividend yield. WBK currently has a Tier I capital ratio of about 9.4%, putting it among the top 10 strongest major banks in the world in terms of balance sheet strength. WBK's return on equity is over 15%, and has a dividend yield of 5.7%. Its direct exposure to the troubled mining sector is only 1.3% of its total lending portfolio; moreover, within its mining portfolio, only 1% of it is "impaired." The biggest risk for WBK and other Australian banks is a major reversal in the Australian housing market.
Unlike their U.S. counterparts just a decade ago, Australian banks have employed stringent underwriting standards in recent years, while recent interest rate cuts by the country's central bank (the Reserve Bank of Australia) have served to support the housing market as a significant portion of housing mortgages are variable and tied to short-term interest rates. I expect the Reserve Bank of Australia to cut its policy rate by another 0.25% this year, bringing it down to 1.75%. This will support the Australia housing market still further, and will be a boon for WBK as well. On this basis alone, WBK should be on Mr. Buffett's radar screen.
Disclosures: My firm, CB Capital Advisors, or I may have material financial interests in WBK, BRK-A, or BRK-B and may hold, sell, or trade them depending on market conditions or when fundamentals change. To find out more about our investment research, please visit us at cbcapitalresearch.com.
