Since the correction, and its subsequent bounce, began, most analysts have drawn on the old adage that banks are, by their defensive nature, safe havens in a time of crisis. That may be all well and good but the problem this time is that the crisis is actually IN the financial sector.
Since the correction, and its subsequent bounce, began, most analysts have drawn on the old adage that banks are, by their defensive nature, safe havens in a time of crisis. That may be all well and good but the problem this time is that the crisis is actually IN the financial sector. Only JP Morgan has to date been prepared to suggest that the credit crunch will actually have a meaningful effect on bank earnings ahead.
Relative movements for the week ending 29 August 2007:
ANZ +0.73 per cent
Westpac +0.57 per cent
St George -0.36 per cent
CommBank -0.37 per cent
National -0.88 per cent
ASX 200 +1.58 per cent
As the bounce from the correction has unfolded, many a commentator has suggested some wonderful valuation opportunities have opened up in quality large-caps due to the one-in-all-in nature of the 15 per cent fall. The same is true of the United States. However, in the US the view is that it's a good idea to steer clear of financials for the time being, until the bad news is all out in the open.
The same should thus follow for Australian institutions. It is only in the "asset originators" such as Macquarie and Babcock & Brown that all analysts agree the level of guilt by association was overdone.
It's not that Australian banks are about to reveal massive sub-prime losses. Just that they are going to find the going tougher in the new credit regime.
The market, however, had obviously decided this week there were better sectors to plunder than the banking sector, as the S&P/ASX 200 index gained 1.6 per cent over the week to Wednesday while the big five lost an average of 0.06 per cent. And only National and St George lost more than the index in Wednesday's drop. There was absolutely no news of interest to report on the big five this week, and thus no analyst reports of interest.
Nor is the market listening to analysts when it comes to Macquarie Bank. The shares had bounced from $62 to $76, but week-on-week Mac Bank is down 4.5 per cent, the bulk of which came yesterday in a 3.8 per cent fall. It is clear any bad news in US financials is going to be reflected in the Macquarie share price no matter what.
On Tuesday night the bad news was that Merrill Lynch had downgraded Lehman Bros, Bear Stearns and Citigroup from Buy to Neutral ahead of profit reports that are expected to be less than positive. There is very little correlation between Mac Bank and any of those institutions, but the market doesn't care.
Babcock & Brown suffered a similar fate, falling 3.7 per cent yesterday, although B&B is actually up 0.1 per cent for the week, bolstered by its profit report in which earnings guidance for FY08 was increased from 30 per cent growth to 40 per cent growth. This prompted both ABN Amro and Credit Suisse to upgrade the stock from Hold to Buy, making B&B a 6/0/0 rating in the FNArena database. But the market doesn't care.
ABN Amro also upgraded Suncorp-Metway from Hold to Buy following its profit report this week, but was the only broker to do so. Suncorp's buy, hold, sell ratio now stands at 3/6/1. ABN's justification for the upgrade came from the insurance side, given the reserve releases Suncorp made to cover this year's storm losses. With more reserves available it suggests Suncorp is somewhat insulated against further catastrophes.
All the brokers liked the reserve releases, but those on Hold are not going to shift until the integration of Promina is underway and integration risks begin to reduce. Once again it is JP Morgan (with an underweight recommendation) taking a largely contrarian view to the colleagues, suggesting that insurance margins achieved on commercial lines were way over market and would surely fall. This will cause Suncorp to fall into an "earnings hole", according to JPM.
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FN Arena for The Sheet.