Analysts bleak on bank profits
Listed bank stocks came under selling pressure again on Tuesday, bringing to an end the rally of the past six weeks. While the announcement of a further official rate cut magnified bank stock losses in afternoon trading, investment sentiment has turned against the sector in the last week following a tide of downgrades issued by broking analysts. The nation's two largest retail banks - CBA and Westpac - copped the biggest share price hits, each falling by more than 1.5 per cent on heavy turnover. CBA closed down $1.27 to $81.05, while Westpac shed 44 cents to $27.93. Trading in major bank stocks was most volatile after the RBA announced its latest official rate reduction as some institutional investors moved to reweight portfolios to other ASX sectors. The financials index was a drag on the overall market as most other sectors recorded gains. Analysts at Goldman Sachs are the latest to revert to a bearish stance on the banking sector after a report published on Monday recommended clients offload their holdings of Commonwealth Bank and Bendigo shares. Bank analysts Andrew Lyons and Ashley Dalziel argue that the market has underestimated the earnings impact on the sector of the RBA's shift to an easing bias on monetary policy. "Reflecting their heightened exposure to lower rates and elevated valuations, we downgrade both CBA and Bendigo to Sell (from Neutral)," the analysts told clients. "While their large deposit bases highlight their strong franchise positions, we have long argued that they also represent a significant earnings headwind when rates fall from such a low level." Lyons articulates at least five factors likely to undermine CBA's near term earnings disproportionately compared to its peers, including its low cost deposit base that offers little room for repricing in response to official rate cuts. "Given its higher exposure to more rate inert deposits, the rate it charges on its deposit base tends to be relatively low, which provides CBA with less opportunity to reprice them as cash rates fall," he stated in the report. "We therefore think that CBA's NIM trajectory will underperform peers as rates fall from an already low starting point." Goldman Sachs has set a price target on CBA scrip at 74.95 - well below Tuesday's closing price of $80. The outlook for regional banks is even more downbeat, with Bendigo's large retail deposit base and high exposure to mortgage lending making it especially vulnerable to price leaders in retail banking. Deutsche research analyst Matthew Wilson also highlights earnings pressure on retail focused ADIs in a new report that recommends investors boost portfolio exposures to business oriented banks, such as NAB. "We prefer banks that are light on retail and heavy on business given our concerns on the revenue, credit and capital impacts of a long housing slowdown - the result of a material and irresponsible housing over-lend," Wilson told clients. "Add to this the NZ Capital Call, ongoing issues