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Nathan Zaia: It's been a good three to four months for bank shareholders and share prices are up really strongly. On average, major bank share prices up over 23% plus dividends and that's well up against the broader market. And it's hard to pinpoint exactly what has driven the share price increases. We think part of it is fees around interest rates staying where they are or going higher for longer kind of takes off the pressure around the housing loans and what that could mean for bad debts for banks. And we think it also means that opportunity for banks to reprice their loan book and their deposit book to protect margins.

I think a secondary factor which is supporting share prices is interest from international shareholders and in particular institutional investors. And we can see it on bank registers. So international and institutional have both crept up. And that could be a specific view on the outlook for Australian banks or it could just be wanting more exposure to Australia in which the major banks are large weightings. And then locally you see Australian active asset managers typically are underweight Australian banks. And so if the share price is running up some of them may be trying to close that underweight position that they have. So all that buying pressure again supportive of the banks. We obviously focus on the fundamentals and our recommendations and fair values are based on that and do reflect that.

So where does that leave the banks now? Share prices have run quite quickly quite strongly but there are still opportunities. We think ANZ and Westpac which have been our top picks in this space still trade at modest discounts to our fair value estimates. And we think that the key thing with both of those banks is demonstrating that they can improve their operating efficiency. If you take Westpac for example they've got a target to close the gap of their cost income ratio with their peer group. And we think it's doable. All they have to do is take out a lot of the duplicated systems and processes they have across their brands. So we're going way back to the whole Westpac, St George systems that they have.

Commonwealth Bank on the other hand and it's a bank that we still do view as expensive. And I think any disappointment in earnings could cause a sell off. So our outlook for the banks is soft credit growth, margins still coming under a little bit of pressure and bad debts to rise from where they have been from the banks but still be within long term averages. When it comes to margins there still is that pressure from competition in mortgages, customers switching from the cheaper deposit accounts into term deposit savings which pay a bit more. But the banks are managing that. We're starting to see some of the pricing competition in new lending come out a little bit. We've seen the gap between the cheapest and most expensive banks for new loans close a little bit as well. And some term deposit rates have come down a little bit.

So we are seeing some signs that the focus on margin is definitely there. And strong house prices, low unemployment, a tight rental market, all those factors continue to contribute to low loan losses for the banks. But seeing a restart to climb, that pressure of higher mortgage repayments is coming through but still below 2019 levels. So nothing to be alarmed about at present. So in the May reporting that we see there probably will be a little bit of softness in earnings. But given the bank's strong balance sheets and surplus capital, we still see room for dividends to be steady or at least grow modestly.