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Australia’s banks are stable – and not going anywhere

Yeah yeah. Bank targets 15 per cent return on equity. They've said that one before. What looked like a disappointing return in the boom years has in the past five become a reminder of just how far banks in the U.S. and Europe have sunk. But for Gail Kelly of Westpac, who just repeated the target on Thursday, it looks all too possible, as it does for Australia's other big banks. Alas, that still does not make the sector look exciting.

You know things are rosy when the worst the International Monetary Fund can find to say about you in a report this month is that you are highly dependent on a domestic mortgage market with low loan-to-value ratios and manageable levels of household debt. Aussie banks, along with their Canadian peers, are held up as examples of what regulators think others should look like. And their ROEs are something rivals can only dream of: since 2008, Australia's big four – Commonwealth Bank, Westpac, ANZ and NAB – have averaged 14 per cent ROE, from 17 per cent in the boom. Top American and Western European names meanwhile are producing about 6 per cent these days, against an average 16 per cent before. Only China's banks, at 20 per cent now and 18 before, look better. But success is no surprise. That makes it hard to see upside for Aussie bank shares from here.

The combined market capitalisation of the big four is more than $300-billion, up two fifths in five years. Relative to book value, they trade at about 1.7 times, which is not expensive for them, but looks full given those big mortgage books. There is a risk of either a downturn at home or investor disenchantment with paying premiums for safe but dull assets. One sign of a heady market was that the Aussies were the centre of speculation when Temasek was said to be hawking its one-fifth Standard Chartered stake. Investors probably do not need to fear being taken on an overseas adventure from this lot, but they are unlikely to see their holdings go anywhere at all. A 15 per cent ROE never looked so dull.

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