Two weeks ago we noted outperformance by the banking sector within a rally in the ASX 200 had sent the share prices of the Big Four well ahead of average broker target prices. Last week we noted that despite a dip and recovery, bank prices had not much moved. This week has seen a run up to a new rally peak (3750 in the ASX 200) on Monday, followed by a pullback again. Bank prices are today little moved from last week, meaning bank prices have not moved any higher for two weeks now.
The average price movement in the big four this week was a 0.4 per cent gain to the ASX 200's 1.7 per cent loss. Best performer was NAB with a 2.5 per cent gain.
We have been noting that, in FNArena's experience, when bank share prices trade in excess of their targets an imminent pullback is signalled. The only way a pullback could be avoided is if brokers significantly increase their price targets. This week BA-Merrill Lynch increased its 12-month target on Westpac by 0.3 per cent, Commonwealth by 3.6 per cent, ANZ by 12.6 per cent and National by 15.3 per cent. The latter two are quite significant moves.
Despite the moves, the Merrill's analysts, who have always been leaning to the more bullish side of expectations, made no dramatic change to their view. Indeed they largely reiterated their observation of increased credit growth market share for the major banks, leading to higher margins, leading to a bigger buffer against bad loans than had earlier been expected. This time, however, they plugged some new numbers into their models rather than just talking about them. And the target price increases fell out.
Despite the target increases, Merrill has a buy rating only on Westpac. It maintains a neutral rating on ANZ and sells on both NAB and CBA. A cynic might say the target upgrades were just a matter of playing catch-up to the market. And despite the target increases there has been minimal impact on average targets, such that at the close of trade Wednesday all of the four were still trading four to six per cent above their averages.
Last week we noted the net number of buys to sells (not counting holds) on the big four within FNArena's broker universe had tipped over from 10/8 to 9/10, putting sells ahead of buys for the first time in a long time. This week research house Aspect Huntley downgraded Westpac from buy to hold, making the aforementioned ratio 8/10.
The most bullish broker in our universe - Macquarie, which has a buy rating on all four banks - this week released a report which declared: "The recent rally and market outperformance of bank stocks has left no near term upside. Relative valuations also appear fair." The analysts did not follow up with any ratings downgrades, but one presumes any further rally might prompt some movement.
UBS pointed out earlier this week that at the close of the first quarter 2009, the analysts' bank sector - the four majors plus Bendigo & Adelaide and Bank of Queensland - had risen nine per cent for the quarter against a fall in the ASX 200 of two per cent. Since November 2007 - the market peak - banks have fallen 40 per cent in value while the ASX 200 has fallen 44 per cent.
Most of the banking analyst fraternity, with one or two exceptions, told us all to move into Aussie banks when the subprime crisis first hit in 2007 because "banks are traditionally defensive". How happy they'll be now to look up from the queue at the CES and see they have been vindicated. The banks have outperformed the market since the peak!
One that got it very right - Brian Johnson - has been snapped up by CLSA Australia recently at JP Morgan's expense.
This week saw the banks pick up a few more handy points of margin when the RBA cut its cash rate by 25 basis points. Westpac, ANZ and CBA passed on only 10 points out of 25, while NAB greedily hung on to the lot. This came as no surprise, as the banks all said weeks ago further rate cuts would not guarantee cuts to loan rates as bank funding costs had risen again. Given all the charts point in the other direction, economists, and the Treasurer, were rather confused by this assertion. But bank shareholders should be happy with a few more points in the can.
The big news of the week was a trading update from Bendigo Bank.
The flipside of the favourable trends that have supported the share prices of big banks is that other banks may not be doing so well. In this case the losers in Australia have been foreign banks, some of whom have packed up and gone; non-bank lenders, who can no longer access securitisation markets because there aren't any; and regional banks.
Regional banks are losers simply because they lack scale, and have smaller deposit bases and a greater reliance on securitisation markets and offshore funding. They have lower credit ratings as a result, and now pay even higher spreads for that funding. As a result regional banks' margins in Australia have been under severe pressure.
The outcome is that on Monday, Bendigo downgraded the June 2009 financial year profit guidance from a previous $270m expectation to a $205 million to $218 million expectation.
The downgrade prompted some rapid forecast earnings reductions from all brokers, including Deutsche, which already had a sell on the stock. JP Morgan and Credit Suisse also had sells, while UBS and RBS downgraded Bendigo to sell on Monday. Macquarie's analysts had upgraded Bendigo from sell to hold only the week before, so they were feeling a bit sheepish.
Macquarie did, nevertheless, maintain its rating, suggesting that while funding remained tight and asset growth was slowing, Bendigo was making gradual progress in restructuring its loan profile. Such a view was echoed by BA-Merrill Lynch, which retains a lonely but stoic buy rating in a fresh 1/4/5 B/H/S ratio. Bendigo shares were down around 13 per cent for the week.
Rival regional Bank of Queensland, which will publish its February 2009 half year results today, fares little better on a current ratio of 1/5/4.
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