Where to for the big four?

Photo of Michael Gable By Michael Gable

min read

Australia’s big four banks are arguably some of the most profitable and best capitalised in the world, attractive enough to prompt Warren Buffet to say he would be looking to invest in at least one Australian bank in the foreseeable future.

The banks have had a great run in the past few years, helping drive the Australian sharemarket higher and becoming the dominant sector in the S&P/ASX 200 index. After getting a leg-up during the 2008 Global Financial Crisis with the government guarantee and access to cheaper capital, the fall in interest rates has further fuelled the bank rally.

Low interest rates have caused borrowing to increase, bad debts to decrease, and has made investing in banks more attractive for the income-hungry investor as dividend yield grew ever higher compared to the cash rate and bank deposits. Bank profits have continued to break record after record.

But it has to be asked, is this era over and, more importantly, where are the share prices heading?

Some commentators have made the assumption that it cannot get better, therefore bank share prices will now fall. They also point to incoming Australian Prudential Regulation Authority (APRA) rules on capital requirements, which will make returns per share a little tougher to achieve. You are probably aware that Warren Buffet is not a short-term investor. But even if you allow for a slightly shorter investment timeframe, there are still opportunities from time to time.

The banks tend to elegantly respect some obvious support and resistance levels on their price charts. This means that by looking at the technical aspect of how the banks are trading, we can gain insights into whether we need to be worried about share prices at current levels.

The more you understand these levels and patterns, the more you will start to spot opportunities and discover better entry and exit levels.

Here is a charting overview of the big four banks:

(Editor’s note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).

1. Commonwealth Bank of Australia (CBA)

Source: AmiBroker

The largest bank and the largest stock on the ASX 200 reached record highs this year and pundits started to wonder when it would crack the elusive $100 level. For the past few years it has trended higher, being contained mostly within a very obvious channel. In ASX Investor Update a year ago, we predicted CBA would be at record highs before the end of 2014.

After achieving this in December (above $86), it broke beyond the channel and raced to above $96. After falling back and breaching support near $90, it was always going to fall further and we saw the share price with a 7 in front of it during June.

While some were commentators were losing their heads, a quick look at the yield indicated an after-franking return of nearly 8 per cent. The stock was cheaper than in January, when the cash rate was 0.5 per cent higher than today.

Not only that, but CBA was sitting back on some very strong long-term support and we were happy to buy it. Despite bouncing 10 per cent from those lows, a glance at this chart suggests there is a good chance CBA will continue to rise and go above $90 this year.

2. ANZ Banking Group (ANZ)

Source: AmiBroker

ANZ’s price action was more subdued in 2014 compared to CBA. This chart shows that it was converging to a point during the year. This “symmetrical triangle” pattern usually sees a breakout in the direction of the preceding trend (which was up), and it usually happens before the triangle makes a point.

After spotting this breakout in January, we expected a new high for ANZ, which it achieved in March. This rally of nearly 15 per cent came to an end with a combination of trading ex-dividend and general market weakness.

You will notice that ANZ came back to re-test the point of that triangle during June. The other thing to realise is that it has pulled back to a longer-term support line.

Like CBA, ANZ is now bouncing off the lows. CBA is the only big four bank with a dividend on offer in August, so it has performed exceptionally well. But ANZ is still clearly finding some good buying support and should head higher. Expect levels as high as $36 before resistance starts kicking in.

3. National Australia Bank (NAB)

Source: AmiBroker

NAB has been trading in a similar way to ANZ for the past few years. It was trending higher before spending much of 2014 tracking sideways and using up some time. However, instead of forming a triangle like ANZ, NAB’s pattern was what we refer to as a “flag formation” (indicated by the blue lines). They both end in a similar way.

The more time a stock uses up tracking sideways, the more explosive the breakout. We noticed that NAB also made a breakout in January and then rallied very strongly. When it pulled back with the rest of the market recently, it came back to some longer-term support (indicated by the red line), just like its peers, and is now trading back above the breakout level from earlier in the year.

If NAB continues to respect these key support levels, you would expect it to continue trending higher over the course of the year.

The other thing to realise is that unlike the other banks, NAB has still failed to break through to all-time highs set before the GFC. Because of this, some suspect it can have a bit of “catching up” as it exits its troublesome overseas businesses.

4. Westpac Banking Corporation (WBC)


Source: AmiBroker

WBC is also, not surprisingly, still in a long-term price uptrend. It has behaved in a similar fashion to ANZ and NAB, where it was tracking sideways for much of 2014 before finally breaking out and having a brilliant run earlier this year. I have highlighted on the chart some very obvious support lines and in the shorter term we expect it to reach $37.


Talk of the banks’ demise is premature. I have highlighted how they tend to respect some key resistance and support levels. The rate of share price increases could be slowing and volatility may increase as they face headwinds over coming years.

About the author

Michael Gable is managing director of Fairmont Equities, a share advisory firm. He is also a media commentator and board member of the Australian Technical Analysts Association.

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