Positive sentiment overflowing

“This positive feeling is likely to help the broader Australian market in the short term and we’ll get a price-to-earnings increase in the banks, ” says Paul Taylor, portfolio manager of the Fidelity Australian Equities fund.

“But that valuation-driven sentiment can only take you so far. You really need those underlying earnings of our companies need to come through, though I don’t expect a huge divergence from the US market.”

Bank of America, JPMorgan and Wells Fargo all reported strong results and in response investors lifted their share prices to multi-year highs.

“US financials have had a very good run post-election,” says Jon Adams, senior investment strategist at BMO Global Asset Management.

“The data we’ve gotten from the big banks has been very good and we do expect this sector to post strong earnings mostly due to the rising interest rate environment.”

While American banks are looking to the prospect of more expensive debt, Australian banks, which begin reporting in February, are likely to keep growing slowly as lending growth remains constrained, with limited expansion in interest margins and some bad debts on the books.

“There are still headwinds for the banks, but generally they’ll be okay,” says Mr Taylor. “There’s not a lot of growth, maybe mid-single digit growth, but investors will see that as a reasonable job.”

In a note to clients on Monday, Deutsche Bank suggests Australia’s major banks are now cheaper than a selection of offshore banks, excluding Asia and UK banks, on a 12 month forward per-share basis.

“Overall they provide a much better forward yield,” says Andrew Triggs, research analyst at Deutsche Bank.

Mr Trigg’s and his team calculate the average 12 month forward dividend yield for the big four banks is 5.5 per cent, now well below the 5-year average of 6.2 per cent.

“On a relative basis the sector still looks attractive against other interest-rate sensitive sectors,” he says.