In another busy week (ending Thursday) for the Australian banking sector, an average price rise for the big four of 1.4 per cent fell short of the ASX 200's rise of 2.5 per cent. Commonwealth Bank was again the star, up 6.6 per cent, while Westpac rose 4.2 per cent, ANZ Bank fell 4.1 per cent and National remained steady.
CBA's jump almost matched that of the previous week. The bank reported its interim profit this week but warned brokers last week that consensus operating profit expectations were 20 per cent too low, and as such the necessary adjustments to analyst forecasts had already been made and the result held no further surprises. The bank did warn there may have to be a reduction in dividends, but analysts believe this is a good measure for the times and any cut would not be material.
Between Ralph Norris' warning and the actual CBA result release, both NAB and ANZ provided trading updates. In NAB's case the update was indicative of an intention to provide the market with more frequent disclosure, while ANZ received a "speeding ticket" from the stock exchange due to a previous sharp fall in its share price. On that basis, an update was provided. ANZ will publish a more conventional trading update in two weeks time (on Thursday, 26 February).
That appeared to leave Westpac as the silent type for the moment, although the bank yesterday said it would update the market next Wednesday (February 18). Westpac will also publish its second "pillar 3" disclosures on that day, a document required as part of the requirements of the Basel 2 regime and that produces data on receivables and impairments unlikely to reconcile to previously published financial data.
Westpac remains, nevertheless, the premium bank stock choice among analysts, with or without an update.
A quick look at the FNArena consensus price target explains why: CommBank shares are currently trading slightly above the consensus price target, while Westpac shares still have a gap of some 11 per cent to fill.
Westpac's share price rise is also likely to have been helped by CBA's brighter performance. The two are seen as the less risky of the big four, with NAB and ANZ holding the opposite, more dubious, honour.
While Westpac is the analysts' number one pick (on average), CBA is number four. This is not a reflection of risk assessment per se but a consideration of current share price versus analyst valuation (see price targets mentioned above). Analysts have long suggested CBA does not deserve a valuation premium over its peers. Westpac, on the other hand, is seen to be held back by a market worried about the success or otherwise of the St George integration.
That CBA should jump significantly once on the positive profit warning and again on the actual result is testament to a quietly pervading feeling amongst analysts that perhaps 2009 bank revenues may not be quite as bad as first thought. This feeling was further reinforced by the NAB update, which roughly matched CBA's improvement on the revenue line.
CBA scored no fewer than three broker upgrades (of the ten leading brokers and advisors in the FNArena database) from sell to hold and the average target price rose six per cent to $30.58.
Last week the CBA share price had caught up to the average target, suggesting that either the stock was overbought or the analysts would have to rethink. The analysts have now rethought, but the share price has caught up yet again. Overbought, in the short term, is looking more likely.
ANZ's forced update, however, was not as pleasing. The bank did not match its peers in revenue improvement, which was largely a reflection of its Asian acquisitions and the cost burden they have brought. The other banks are managing to reduce their cost bases. ANZ also remains at risk of further write-downs in the value of its toxic debt security positions, while analysts were relieved that NAB's conduit was apparently in no need of revaluation.
ANZ suggested that its 2009 revenues will show only "modest" improvement, which does not compare well to peer guidance. The other banks are building up a buffer against bad loans. Citi now expects ANZ to cut its dividend by 20 per cent and go to the market for more capital.
The bank itself late yesterday attempted to kill off the rumour. In a short statement ANZ said there were no current plans for a capital raising and rather pointlessly recited the tier one capital ratio for the bank as of September 2008 (which was 8.35 per cent).
A lot of this discussion is largely academic, nevertheless, for one spectre remains morbidly hanging over all Australian banks - that of bad debt growth.
Sell-side analysts agree that of the big four, it is NAB and ANZ that are probably the best provisioned at present. CBA, on the other hand, is seriously underestimating the risk of bad debt growth as far as analysts are concerned. CBA is expecting its bad loan book to grow to 60 basis points worth of all loans whereas analysts, and other banks, see 85 basis points as more likely. NAB is in a more perilous position than the others, given its exposure to the basket cases that are the New Zealand and UK economies at present.
How bad might bad debts get? How long is a piece of string? Twelve months ago most (but not all) bank analysts in Australia were naively oblivious to the possibility that the credit crisis could cause a major round of delinquencies and defaults.
Most were using the 2002 recession as a benchmark, yet 2002 was merely a blip. It has taken a while, but finally analysts are making more relevant comparisons to the 1992 recession, and fearing the worst. But while global recessions come and go, the fear is that this one might mean entering new territory. How does one predict bad debts in a state of such uncertainty?
The answer is one doesn't with any degree of confidence. That is why analysts are largely split on their levels of doom or otherwise. The only other rating change among the big four this week was for NAB. BA-Merrill Lynch downgraded NAB to underperform from neutral, citing bad debt risk in the UK in particular.
Outside of the big four, last week's Macquarie Group's guidance downgrade was taken mostly in good spirits by the market. While the first drop in profit in sixteen years hardly requires celebration, if Macquarie can still make as much as half of last year's profit in the current environment this is seen as not a bad outcome. Valuation risks remain, but Macquarie's balance sheet is strong and the bank stands to possibly benefit from economic weakness by snapping up distressed assets. Macquarie still boasts four out of eight Buy ratings and no Sells.
It was a very different picture for Suncorp-Metway, which announced a share placement at a 35 per cent discount to the previous closing price. While analysts shook their heads in weary disbelief, consideration of investment value had to now be made at the new low price of $4.50. The result is Suncorp maintains five buy ratings out of seven brokers still interested. The average target price is $7.93 - some 40 per cent above the last traded price.
The reason analysts are still keen on Suncorp is that they believe there is no way the banking-insurance conglomerate can survive in its current form. The insurance game looks reasonably positive in 2009 (although bushfires have since hit hard) and Deutsche Bank points out that a $4.50 share price actually implies a negative valuation for the troubled banking business. There are banks out there that would value Suncorp's banking operation much more highly than the market currently does, analysts suggest, so management has no choice but to act and act now. Thus analysts see Suncorp shares as offering value.
FNArena