Banking sector wrap - week ending February 5
On an arithmetic average, the four big banks outperformed the S&P/ASX 200 index in the week ended Thursday by advancing net 0.5 per cent to the index's fall of 2.8 per cent. Relative share price movements for the week ending 5 February 2009: ANZ -7.01 per centCommonwealth 7.92 per centNAB -0.21 per centWestpac 1.78 per centS&P/ASX 200 -2.78However, the week was largely about Commonwealth Bank, whose shares jumped 7.9 per cent for the week. Otherwise, the share price performances of banks were mixed.Commonwealth currently rates as the last pick among sell-side bank analysts for the four major banks, if one nets all the buy, hold and sell ratios of the ten leading brokers and advisers in the FNArena database. Westpac is number one pick, followed by National and ANZ. CBA's upgrade of its profit outlook for the December 2008 half year, and the subsequent jump in its share price, did little to encourage analysts to elevate the bank from its status as least favoured given its share price has now reached the average 12-month target price set by the brokers (implying no more sustainable upside from here). Despite a generally cautious view on the sector (and a total of only nine buy ratings out of a possible 40 in our database), the average 12-month target for Westpac is 15 per cent above Thursday's close, NAB's is 25 per cent and ANZ's 29 per cent.The reason CBA outperformed this week is due to Monday's unsolicited announcement from CBA that consensus market estimates of the bank's interim profit (to be released next Wednesday) were 20 per cent too low. The bank's revenue performance will be much better than analysts were calculating, the bank suggested. As analysts updated their models the general feeling was that perhaps CBA had achieved more effective cost cutting than analysts were assuming, and that business growth had been a bit better than one might expect in such gloomy times. Clearly credit demand has slumped but a "flight to quality", which has seen borrowers and depositors abandon more risky small banks and non-bank lenders since the credit crisis began, has seen the Big Four's market share improve significantly.JP Morgan went out on a limb to suggest perhaps it had underestimated the new business generated by the rapid fall in mortgage rates in the last few months, courtesy of Reserve Bank cash rate slashing, and the incentive provided by government grants. Mortgage lending may well have grown more than expected, although JP Morgan noted that margins were still very slim. With all banks under pressure to pass on RBA cuts there is still not a great deal of profit to be had through mortgage lending. JP Morgan further noted that small businesses had not enjoyed anything like the same cut in lending rates, and that while volumes would be down the banks should be cleaning up on those particular margins.Duly chastised, all analysts made some upward adjustments to their earnings forecasts for CBA. However,