Australian bank stocks have enjoyed a second strong week of trading, with the average price of the big four rising 7.9 per cent in the week ending Thursday. The ASX 200 rose 4.8 per cent.
Last week the big four rose 15 per cent - well ahead of the 7.5 per cent rise in the ASX 200.
Once again the major influence on bank share prices came from the United States. The unveiling of the Obama administration's long awaited plan to tackle US toxic asset positions was well received by Wall Street, sparking a one-day seven per cent rally in the S&P 500 on Monday.
History shows that stock markets bottom around nine months before economies bottom. History also shows that it is the financial sector, often hardest hit by recession, which turns first and becomes the standard bearer for a rally.
Leading US bank (and Dow Jones index component) Citigroup is now up 204 per cent from its lows.
History also shows that the most violent rallies occur within bear markets, not in bull markets.
Wall Street has, over the past two weeks, developed a fresh sense of optimism that perhaps the worst is over. This is the first such bout of optimism since the sub-prime crisis hit.
Most notable was this time last year, when the rescue of Bear Stearns led many to believe the biggest shoe had fallen and signalled an end to bearishness. How wrong an assumption that proved to be.
There are others on Wall Street who refuse to be convinced the current rally is anything more than a bear market or suckers' rally from a temporarily oversold position. The faster US financial stocks accelerate their gains, the more convinced the stoic bears become. Such an opinion also translates downunder.
For the week ending Thursday, shares in Westpac are up 8.2 per cent, National Australia Bank 7.7 per cent, ANZ 13.7 per cent and Commonwealth 1.8 per cent.
It is not hard to see from these numbers which bank was most oversold on sentiment prior to the market turnaround (ANZ) and which had already outperformed the rest of the bunch (CBA).
The local market has been feeding on Wall Street exuberance. Investors have taken the view that if Australia's banking sector is not in as bad condition as the US, and the US banking sector is rallying, then the Australian banking sector must be well worth buying at these levels as well. Get in quick - don't miss out.
The problems in the United States banking sector are extensive and will be enduring. This is the key finding of the Reserve Bank's latest Financial Stability Review, published yesterday.
The raft of measures aimed at easing credit markets in the US is laudable but the results will not happen overnight. The RBA has reiterated the Australian banks are sitting pretty in comparison.
Australian banks are well capitalised, show no threat of losing their valuable AA ratings, have little exposure to sub-prime loans and have so far shown only a moderate increase in delinquent loans compared to the last big recession of 1990.
The RBA does expect problem loan levels to rise as the Australian economy loses momentum in 2009, but on the world stage Australian banks have little real reason to be fearful.
The RBA, however, does not pass comment on bank share prices.
Last week
FNArena brought to readers' attention the fact that bank share prices had caught up to or exceeded average broker target prices. Every time this has happened in the past the rally in bank shares has petered out.
The only compromise could be if brokers see fit to raise their share price targets. But while fresh optimism in the United States means a slightly brighter global picture, bank analysts are not fooled that the road ahead for Australian banks in 2009 does not still remain a tough one, particularly on the bad debt front, as the RBA has suggested.
Indeed, prior to the weekend bank share prices had slipped somewhat, but then came the US toxic asset package and shares turned around to surge ahead once more.
Citi is among the local brokers that say the outlook has brightened somewhat for Australian banks, enough so that Citi has increased forecast bank earnings on the back of improving margins, while maintaining that bad debts remain a threat.
Citi this week increased its target prices on each of the big four.
On that basis, one might be forgiven for assuming that this time brokers would move targets ahead of share prices rather than share prices fall back to targets.
But not only was Citi alone in making sector-wide target increases, the increases made still fell short of current trading prices. Citi made particular note of this outcome and downgraded ANZ from buy to hold. Citi now has all four big banks on hold.
Citi's target increases improved average targets by 1.2 to 2.6 per cent. But as we stand at the end of Thursday, Westpac is now 5.6 per cent above its average target, ANZ 7.4 per cent, NAB 4.1 per cent and CBA 6.6 per cent.
In FNArena's experience, such premiums will not be sustained. Aspect Huntley also downgraded ANZ to hold this week from accumulate.
Within every range of values however, there are outliers. Macquarie's bank analysts lead the optimism stakes and have all the big four still on outperform ratings. Macquarie is maintaining targets that to date remain above traded prices.
Not only is Macquarie keen on the big four, it has this week upgraded its view on Australian regional banks from underperform to neutral, citing upside potential in the current environment from earlier weakness. The analysts expect the regionals to now outperform in the near term to the April-May bank reporting season.
Macquarie cites Bendigo & Adelaide Bank as its top regional pick.
This week saw two downgrades on Macquarie Group from buy to hold. Citi and RBS were the analysts. Aspect Huntley moved the stock from accumulate to hold.
In simple terms, MQG shares have rallied nearly 60 per cent from their lows and it's time to take a breather.
MQG, and its former incarnation Macquarie Bank, have always polarised bank analysts to some extent. Is it an investment bank? Is it a "financial engineer"? What is it?
The result has been that in the past, and to this day, bank analysts have always offered up a wide ranging spread of target prices on the Group. JP Morgan even went so far as to offer two target prices - one as an investment bank and one as a financial engineer.
The average target price in the FNArena database for MQG is currently $30.84 - some 24 per cent above Thursday's closing price. But for two of our three downgraders (Aspect Huntley does not set target prices), MQG shares have already surpassed individual targets.
On the flipside, top-marker Credit Suisse's target of $40.00 is still some way off. No broker in the FNArena universe has a sell on MQG.