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• A look at the Australian Banks

• Will falling interest rates help?

• The big 4 banks analysed

This week…

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General Advice & Risk Warning

Please note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or

advice given does not take into account your particular objectives, financial situation or needs.

Therefore at all times you should consider the appropriateness of the advice before you act further.

CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You

can lose more than your initial deposit so you should ensure CFD and Forex trading meets your investment

objectives. We recommend you seek independent advice. Strategies and charts used in this presentation are

for example only. You are reminded that past performance is not indicative of future performance.

Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product

Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you

decide whether or not to acquire any financial products. These documents are available at www.invast.com.au

Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283

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This week we look at the following topics:

• A look at the Australian Banks

• Will falling interest rates help?

• The big 4 banks analysed

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We published our 2015 Outlook Guide last month,looking at global markets and touching briefly on ASXlisted shares in the last section. February is an interestingand eventful month for the Australian share market. Weaim to dedicate the next four weeks to Australian sharesand this is made more exciting by the rollout of Invast’sDMA CFD offering, which means many large global sharescan now be traded – either long or short.

Dear Readers,

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February sees many companies who have a 30 June financial year end date reportingtheir interim results. Some companies will be reporting their full year results, so it is avery busy time in the markets. Our analysis will be broken up as follows:

Week commencing 2 February 2015: Outlook for Australian banksWeek commencing 9 February 2015: Mining companies likely to remain losersWeek commencing 16 February 2015: Our six key picks & further analysisWeek commencing 23 February 2015: Result review & upcoming dividends

Week commencing 2 February 2015: Outlook for Australian banks

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The Australian banks are likely to feature fairly prominently this reporting seasonbecause they are all significant constituents of the ASX200 index. A fall in commodityprices and lower mining company shares means the banks are now among the largestcompanies in the country. They have become very popular among investors seeking yieldbecause of their high dividend payout ratios. What many investors and traders need tokeep in mind though is that banks are by their very nature in the business of pricing risk– and at some point they will misprice this risk and face write-downs. As we wrote in our2015 Outlook Guide report, complacency is very dangerous in markets.

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What drives bank valuations?

The three most important parts of a bank’s valuations are:

1) The size of the balance sheet – how large the loan book is and how this is funded2) Net interest margins3) Operating costs, including bad debts

The problem for the Australian banks over the past few years has been the absence oflarge, double digit balance sheet growth, although they have surprised the critics. Loangrowth is tied very closely to the overall economic environment. It’s hard to see loangrowth exceeding GDP growth over the long term, so the banks cannot completely hidefrom this. The economy would need to improve before loan growth starts to return tolevels seen during 2000-2009.

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Luckily for the Australian banks, they have managed the other two points very well.Net interest margins is the difference between the rates they receive on their assets lessthe rate they pay on their liabilities. A falling interest rate environment has helped theAustralian banks price their books relatively well. There has been some margin erosionbut not to the extent where it has hurt their earnings. We think that competition willcontinue to add pressure to margins and if anything there might be some negativesurprises in the coming weeks. We will be watching this element of banking valuationsvery closely.

There is a lot of anecdotal evidence across the market that banks are having to fightharder to write loans. Further RBA rate cuts will help insulate margins but thecompetitive threats will also increase. We all know what happens when rates are cut andcentral banks encourage risk taking. There will at some point be a problem with assetquality, which brings us to the third element of banking valuations – operating costsincluding bad debts.

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We don’t think Australian banks will report any problematic elevation, of material size, inbad debt expenses in the coming weeks. Rising asset prices, particularly housing andsteady arrears means there is unlikely to be a shock at the moment.

That doesn’t mean there won’t be a shock in the future. Investors and traders need towatch corporate loans – these are usually very large in size and have the ability tosurprise the market. While there doesn’t seem to be any systemic issues in theresidential space at the moment, there could be some nasty loans from businessesstruggling with the slowdown in the economy – particularly those exposed to mining.

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So with that in mind, the big four Australian banks are likely to report steady earningsover the next few weeks. We need to keep in mind that only CBA has a 30 June balancedate, all three other peers will report a few months later. There will be trading updatesand we think the priority of concern from the market will be:

1) Trend in margins2) Commitment to dividend payments3) Movements in asset quality

Going short the banks may yield a large payoff at some time in the future, we don’tdoubt that and we have always remained of the view that complacency is dangerous.We just aren’t sure that this reporting season will provide that opportunity. We will bekeeping a close eye on the numbers and will feature the outlooks and CBA reportingnumbers in the last week of this month.

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Falling interest rates

The market is starting to price in more interest rate cuts. This is not of surprise to Invast,we have been predicting this for the past six months or so and have regularly publishedviews of this nature on our weekly blog posts. We think the most likely rate cuts fromthe RBA will come in March and June this year, although timing is fairly difficult. Whatthe RBA does is very important if you are trading the banks. Interest rates are already atrecord low levels in Australia and likely to fall further.

Don’t lose sight of this.

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Falling interest rates benefit banks in a few ways:

1) It helps banks insulate their margins as they lower the price they pay for deposits andhope that they can price risk on their loan book with a slightly large margin buffer2) It helps customers make repayments, low interest charges help with affordability3) It provides support to asset prices, in turn reducing the relative loan to valuation ratiofor banks

Banks are likely to benefit for as long as interest rate policy is loose. We are likely to seesome commentary from the banks over the next few weeks reaffirming this. The bankswill want to encourage the RBA to do more. It is in their benefit.

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Investors and traders need to look forward though and see the first opportunity thatthings might turn. When this occurs, investors will start to re-evaluate the earningsprofile of the major banks and the trend by investors to move into dividend payingexposures. Again, this might not be the case in February but it could be the case towardsthe end of the year. We are just highlighting the current RBA stance.

Dividend payments

Despite a push towards banking shares for their dividends, there is a trend among thebig four Australian banks to fall by more than their dividends in the weeks after theytrade ex-dividend. Keep this in mind for CBA. The stock is likely to be bid strongly into itsresult and following the announcement but the share price action could see this trendreturning when the stock trades ex-dividend.

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We previously wrote about ANZ in our InvastInsights report published in May last year. Youcan read the full report here.

Australia and New Zealand Bank (ANZ)

We spoke about our positive view for the strategy into Asia but of the inevitableproblems which will arise as China slows down. In that report we made clear ourpreference to purchase ANZ at a very large margin of safety and to date we have notbeen afforded that opportunity.

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We wrote “…In the past we have said we are willing to wait for ANZ to fall back toaround $27-$28 per share before we start adding it to the portfolio. This might nevereventuate but it’s a risk we are prepared to take. We don’t see an immediate reason tobuy ANZ even though ANZ is our preferred pick among the Australian banks. There is abig difference between a preferred pick within a bunch of stocks and an investmentworth buying. One is a relative measure, the other absolute and we think absolutechoices are what our clients should be focusing on. With that in mind, we are happy to sitback, relax and see how the Australian banks perform over the coming few years. Wewon’t hold any of them in the portfolios because we want to be able to sleep at night.When we see over reaction in the market, we will take the opportunity to jump on boardand buy them. We aren’t bearish, we are just being prudent in our investmentapproach…”

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Chart: ANZ share price via Invast DMA CFD platform

Our view is unchanged, we remain an opportunistic buyer but only near the $28 pershare level which we are unlikely to see anytime soon – but things could change at somepoint in the future. Until then, the stock is too expensive for us.

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Can it touch $100 per share? That is the bigquestion in markets. We don’t think it’s worththe risk playing into this speculation.

Commonwealth Bank of Australia (CBA)

If $100 per share is the pure upside, at record low interest rates, downside is muchlower in a rising interest rate environment. The risk to reward ratio is not large enoughfor us. CBA is high quality and loved by many retail investors. We don’t doubt that, wejust prefer to sit on the sideline. We’ll watch closely to see if the result matches marketexpectations, it is being priced for perfection and anything short of perfect will be soldoff savagely by the market.

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Chart: CBA share price via Invast DMA CFD platform

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National Australia Bank (NAB)

NAB is an Avoid for us, regardless of the price or valuation. Banking is a business ofpeople and culture. We feel that NAB always disappoints and we have seen this overthe past decade or so. First it was the foreign exchange losses in the early 2000s, then itwas the US subprime exposure followed by problems in the UK banking divisions. Therehas been a great opportunity to trade the shares in the past two years, we just don’t feelthat the risk is worth taking.

There are too many nasties that could potentially show up in NAB’s numbers at somepoint and this underscores why the bank has traditionally traded at a price to earningsdiscount to its peers throughout this problematic period. Our preference is to focus onANZ, CBA and WBC at the right prices.

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Westpac is our preference in the market at themoment. We feel that Westpac has somewhatunderperformed its peers in recent years dueto an inability to grow its revenue line aboveexpectations.

Westpac (WBC)

Things could finally be falling into place with low interest rates and the absence of anyoffshore issues a saving grace. Eventually Westpac will have issues with its balancesheet and the departure of Gail Kelly will be seen as a ‘top of the market’ moment. Wejust don’t feel that this will occur in the immediate future and will be a function of risinginterest rates.

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Westpac has been working hard to drive volumes over the past year and it will benefitimmensely from two more interest rate cuts, should that be the case this year. We justfeel that on a risk to reward basis, it has less good news priced into the numbers andcould potentially surprise on the upside. The major caveat here is to protect any positionwith a tight stop loss in case the numbers go the other way. We also wouldn’t be buyingbefore the result, if the numbers are good there will be time to ease in after it hits themarket.

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Chart: CBA share price via Invast DMA CFD platform

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Which Shares to Buy? ASX Reporting Season Webinar

Invast Insights chief editor and contributing author Peter Esho will summarise hisoutlook on Australian shares during February reporting season. Esho will document hisfindings based on the performance of key stocks and where he believes the bigopportunities lie next year. His presentation will focus on the following 5 themes:

Performance and outlook of the Australian banksPerformance of mining companies and which to avoidHis 6 key stock picks for 2015Key performance result highlights

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Esho is a regular contributor on CNBC, Bloomberg and host of ‘YourMoney Your Call’. His webinar will cover both the fundamental andtechnical outlook on these key themes and a basic introduction toInvast’s new DMA CFD product offering which complements MT4and other services. This webinar is expected to fill fast. Q&A will beopen straight after the presentation. Register now by visitinghttp://www.invast.com.au/resources/webinars.aspx.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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DisclaimerPlease note that you are receiving this report complimentary from Invast Financial Services Pty Ltd(AFSL 438 283). Invast staff members may from time to time purchase securities which areincluded in this or future reports. The authors of this report may or may not be holding a positionin the securities mentioned. Please note that the information contained in this report and Invast'swebsite is of a general nature only, and does not take into account your personal circumstances,financial situation or needs. You are strongly recommended to seek professional advice beforeopening an account with us.

General Disclaimer: This newsletter contains confidential information and is intended only for theperson who downloaded it. You should not disseminate, distribute or copy this newsletter. Invastdoes not accept liability for any errors or omissions in the contents of this newsletter which ariseas a result of downloading this newsletter. This newsletter is provided for informational purposesand should not be construed as a solicitation or offer to buy or sell any financial product. InvastFinancial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

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Risk Warning: It's important for you to read and consider the relevant Product DisclosureStatement, and any other relevant Invast Financial Services Pty Ltd documents before youdecide whether or not to acquire any financial products listed in this email. Our FinancialServices Guide contains details of our fees and charges. All these documents are available hereon our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange areleveraged products and carry a high level of risk and you can lose more than your initial depositso you should ensure CFD and Foreign Exchange trading meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take account of yourobjectives, financial situation or needs. Before acting on this general advice you shouldtherefore consider the appropriateness of the advice having regard to your situation. Werecommend you obtain financial, legal and taxation advice before making any financialinvestment decision.

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