During the past week, each of the major banks released a profit result or 3^rd quarter update. The reaction to ANZ’s release was perhaps the most telling. Whilst ANZ’s result was far from terrific, the share price rallied 5.2% as the market re-based its overly negative outlook.

The key pressures facing our banks are well documented: 1) Increased cost of funding 2) Potentially rising bad debts 3) Heightened competition/low growth 4) The requirement for more capital (hence the spectre of dilutive share placements) 5) The possibility that dividends will decline. From our standing these are ‘known knowns’ – ie they are largely factored in to the current share prices.

But on our assessment, grossed up dividend yields are maintainable in a range of between 7 -9% versus the cash rate at 1.5%. There are 2 parts to every investment equation: in this instance the risk looks to be in synch with the market leading yields.

Whilst, we are less than 50% weighted to the banks at present,we do intend to maintain our current exposure unless the risks materially increase,and potentially look to add on weakness.