The four major bank stocks finished slightly stronger on average this week, rising 1.1 per cent to outperform the ASX 200 which fell 0.9 per cent. Big gains were made on Thursday in an overall market surge, attributed to option expiry. ANZ finished up two per cent for the week and Westpac one per cent, while National and Commonwealth managed gains of only 0.6 per cent.
It was a topsy-turvy week as the ASX 200 flirted with, but failed to breach, its January high. Local bank stocks were influenced by further financial sector volatility in the United States, which centred around quarterly earnings reports and arguments as to whether major US banks would or would not need further TARP injections from the US government post the completion of "stress testing". Test results are due on May 4. After a 20 per cent rally the local market is looking toppy, evidenced by three failures to close above the January high in the last couple of weeks.
The big four have also failed to post fresh rally highs although share prices remain stretched five to nine per cent above their average broker price targets. More brokers have begun to warn that while Australian banks are in relatively good shape from a global perspective, there is little short-term upside from present levels.
RBS moved to put a short-term "trading sell" on Westpac ahead of its full-year result given the premium the bank's shares have reached over its peers. This does not affect the longer term net Buy/Hold/Sell ratio in the FNArena broker universe however, which remains this week at 8/21/10.
RBS further notes that at recent highs, the big four price/earnings ratios have reached levels above 90 per cent of the broad market ratio, which is as high as they ever get.
Focus now turns to full-year results, with NAB reporting next Tuesday, ANZ on Wednesday and Westpac the following Wednesday, May 6. After the strongest rally in the bear market to date, little further upside is expected ahead of the results and share prices remain vulnerable to disappointment.
While brokers are split between the more optimistic, who look to improving market share, margins and trading profits, and the more pessimistic, who fear ballooning bad debts, all equity brokers acknowledge both the former and the latter. Result previews have focused on expectations of strong final quarter revenues based on expanding margins, but these are a bit easier to forecast than bad debt provisions, which can be a bit of a lucky dip.
Macquarie nevertheless warns that the revenue gains enjoyed by the banks as a result of increased market share will have shown signs of fading in the second half. The big four have suffered from a decline in system credit growth but picked up a greater share of the business, thus cushioning the fall. The credit market has now had a year to adjust to the new environment, and Macquarie suggests from here big four credit growth will merely decline with the system as the Australian recession makes itself felt and unemployment grows.
While the banks have complained about rising funding costs of late (which relates to funds rolling over from pre-August 2007 loans) loan margins continue to improve.
The banks have passed on very little of the RBA's cash rate cuts to business loan rates, have held back on variable mortgage rates, and have recently begun raising fixed home loan rates.
There has also been a (belated?) crack-down on loan-to-value ratios in mortgage lending, given the big four have been rushed by first-home buyers presenting only government grants as deposit and little else to make them loan-worthy. The grant scheme is due to end on June 30, but speculation is that it will be extended. Despite arguments that such grants benefit only the seller, the impact of the stimulus is likely to wane even if the scheme is extended given banks now require greater levels of genuine savings as deposit.
The crux of the upcoming full-year results will be bad debts - how much they have increased and how much the banks feel is necessary to put away as provision given falling business profits and rising unemployment. If revenues have indeed been strong, banks may choose to "front-load" provisions, bolstering balance sheets and hunkering down for the recessionary winter.
Tier one capital ratios are now sufficiently adequate at more than per cent, although brokers are expecting dividend cuts of 20 to 25 per cent from ANZ, NAB, and probably Westpac as well, to bring payout ratios back from boom-time bonanza levels.
If the banks are true to form, first-glance results will probably seem pretty good (or less bad) until analysts have had a chance to drill down into the detail. Result quality is as, if not more, important in the current environment as quantity and direct comparison to broker forecast. This has been very much the case this last week in the US in which quarterly "profits" have masked one-off price adjustments from asset sales, cost-cutting and various accounting tricks.
Just as important will be 2010 financial year guidance. The world is currently hanging its hat on the global economy stabilising and beginning to recover by year end. As stock markets traditionally turn six to nine month ahead of economies (they are a leading indicator), the March rally reflects this timing.
Unemployment, nevertheless, lags economic turnaround by about the same amount, which will continue to put pressure on bad-debt growth, particularly at the consumer level. If banks mark down their FY10 earnings guidance in the face of a worsening recession, analysts forecast price to earnings ratios will roll over into lower levels, making PEs expensive.
Outside of the big four, focus returned to the plight of a struggling Suncorp-Metway this week.
When we last left Suncorp it was threatening to disappear out the back door. However its share price fell so low that analysts concluded the value of the insurance business alone implied the banking business was being afforded negative value. Brokers almost universally switched to buy ratings, assuming a break-up of the two businesses was inevitable, with the banking business being sold off to one of the big four or maybe Bank of Queensland.
Nothing has happened, and nor has Suncorp made any indication it might. In the meantime however, Suncorp shares have rallied along with the rest of the market and valuation still assumes some sort of split. But apart from the ACCC indicating it will no longer look favourably upon further bank mergers, at these levels at least two brokers question whether anyone would pay up for the banking business at all.
Citi suggested perhaps the company might only be saved if Suncorp were to sell the more valuable insurance business instead, while BA-Merrill Lynch doesn't think this will happen either. Citi downgraded Suncorp from buy to hold and Merrills downgraded it from hold to sell. Suncorp shares finished five per cent lower for the week.
20090424 bank wrap tab
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