Banking sector wrap - Week ending August 22

Amidst a swift recovery of the local share market Westpac and ANZ continued to outperform. However, King of the bouncers was, of course, Macquarie Bank.

Has it only been a week? It seems like a month. This time last week the stock market was falling out of bed, before falling through the floor on Thursday. Friday saw some more losses but it appeared a bottom was established. At least in the short term.

The Fed made its now historic cut in the discount rate on Friday night and here we are - the ASX 200 is up 3.75 per cent from our last missive, having been to Hades and back in the meantime.

The big five banks, which had generally outperformed in the falling market, managed to hold their ground, rising 3.57 per cent on a price average, a performance probably best described as a minor relative underperformance. Top pick Westpac (WBC) led the charge (up 4.8 per cent), while bottom pick St George (SGB) straggled (up 2.7 per cent).

Relative movements for the week ending 15 August 2007:
Westpac +4.81%
ANZ +4.31%
National +3.34%
St George +2.74%
CommBank +2.64%
ASX 200 +3.75%

The brokers' weekly bank sector reports are largely irrelevant this week, spread out in publication, as they are, from bust to boom. Suffice to say the consensus was in bust that banks and other financials were all cheap. In boom, well, they're mostly still cheap given target prices have simply not moved.

However, JP Morgan reiterated, again, its opposite opinion that the big banks are now going to be hit quite hard by global credit reassessment, given the effect it will have on business across the spectrum.

To more specific news:

The appointment of St George's Gail Kelly as the new CEO of Westpac was seen by three of the four FNArena brokers who deigned to comment as a positive move for Westpac and a negative one for St George. Devil's advocate JP Morgan suggested, however, that Westpac was a much larger and more complex establishment, and that Kelly would do well to stick with the status quo to begin with.

JP Morgan was the only broker to genuinely bother commenting on poor old St George, suggesting now that Kelly's off the bank becomes even more of a takeover target. We also spotted the team of banking analysts at Deutsche Bank cautiously suggesting St George Bank's yet to be announced new CEO may elect to lower Kelly's profit guidance for the year.

When the Commonwealth Bank result released last week was pulled apart by the brokers, their opinions quite elegantly matched the standing 4/4/2 B/H/S ratio in the FNArena database. The Buys liked it, the Holds were unconvinced and the Sells thought it could have been better. While there is a pervading opinion that Retail still needs to pick up, and management might now find that task more difficult, nothing much has changed.

Macquarie Bank continues to make news, on and off the boards. Stock operators are suffering from whiplash, as having fallen 37 per cent from its high to its nadir under $62 the "asset acquiror", as UBS now labels Macquarie (and its cheaper copies), had recovered 13 per ent by the close of trade yesterday. It must be remembered, however, that a fall of 37 per cent requires a rally of 58 per cent to get back to where it started.

The real news of the week was Macquarie's move to establish a separate holding company, which was seen as a positive from all brokers, who have been chorusing that the bank had become as cheap as it was ever likely to get. This even included GSJB Were, who foresaw the potential for 18 per cent to 27 per cent cuts in earnings in FY08 and FY09 as a result of changed market conditions. But possibly most impressive was Macquarie's announcement it had secured $8 billion dollars in further credit.

While the bounce was equally appreciated by everyone from Babcock & Brown to RAMS, a profit result in line with consensus for Allco Finance led brokers to suggest that while Allco will not really hit its straps until FY08-09, its share price had been unduly savaged.

Brokers had advised to buy anything that had fallen the most, but as the ASX 200 now looks to do some work around 6000 we shall await their refreshed assessments with baited breath.

(Which, of course, won't be any different. It will probably take six months before the brokers start to adjust their earnings forecasts. Broker's forecasts are usually about as helpful as last week's Lotto results.)

Produced by FNArena for banking sector e-zine The Sheet.