In another volatile week for the stock market, the ASX 200 finished the week (ending Thursday) down three per cent. The four big banks outperformed the broad market however, falling only 0.9 per cent on average.
Last week ANZ was the star as the market took the opportunity to pick up a stock it believed had been oversold due to its perceived risks being greater than those of its three peers. ANZ again starred this week, ending on a positive note following the market update published yesterday. The update included a 25 per cent cut to its dividend but it was a case of sell the rumour, buy the fact. ANZ shares gained 3.6 per cent for the week.
National Bank is the other of the four big banks perceived as being more risky - at risk of a dividend cut and/or capital raising at some time in the future - and its shares lost 4.8 per cent. Shares in the lead choice of stockbrokers, Westpac, gave up two per cent after good gains last week, while Commonwealth was steady.
There were no changes to target prices for any of the big four this week from the FNArena broker database, and only one recommendation change - GSJB Were downgraded NAB from buy to hold - on growing concerns over the bank's exposure to Europe, where conditions are fast deteriorating. This is dragging on an otherwise relatively healthy local business, the analysts suggest. That leaves NAB with only two buy ratings offsetting two sells, with the other six brokers on Hold.
The analysts at Were also noted this week that according to an independent report by IPD, commercial property values in Australia are on the decline. In 2008, office space fell 3.3 per cent in value, retail 5.4 per cent and industrial 4.8 per cent. Quarterly falls are the worst since 1993. This is just the beginning, say the analysts, who are tipping 20 to 30 per cent falls from peak to trough. At the moment evidence is on best guess, as few transactions have actually occurred.
The four big banks have $114 billion of exposure to commercial property between them, Were estimates, half of which was assumed in the last two years. This top-of-the-cycle splurge is what worries the analysts, who are assuming peak-to-trough bank valuation write-offs of between four per cent and six per cent. Such an assumption represents only half of the losses in the 1990s commercial property collapse.
The good news is the banks are currently provisioned for such losses, but were values to fall the 20 to 30 per cent anticipated, the analysts expect more provisioning would follow.
To that end, UBS analysts have clearly been poring over the CBA result of a fortnight ago, this week noting that increased disclosure from the bank reveals "troublesome exposures" (that is, a default likely in 12 months if conditions don't improve) rose 67 per cent in the first half to $4.5 billion. The bulk of the exposures are to the property sector and non-bank financial institutions, with the transport sector rapidly deteriorating.
The good news is that there was no more bad news in Suncorp's result this week, given Suncorp had already dropped its bombshell in an earlier update. Analysts nevertheless still found cause to reduce earnings' forecasts further, leading to a fall in average target price from $7.60 to $7.39. It was notable that the banking and insurance conglomerate's chief executive had previously announced his departure after a succession period, but has since left and not been heard of since.
The result that really did please the market this week was that of Bank of Queensland. The regional's half-year beat analyst expectations, given strong cash earnings growth.
The market had been hard on BOQ, given its status as a regional bank and not a major. Given its reliance on defunct intermediation markets for funding, as opposed to the sort of deposit bases the big four enjoy, securities analysts had been prepared to assume the worst. No doubt market share had been lost to the majors and bad debts had grown. BOQ had earlier raised $108 million in capital, which was about 40 per cent more than analysts had expected.
This move already looked ominous, and then last week a fellow regional, Bendigo and Adelaide Bank, posted a miserable first-half performance.
But the Queenslander put the market to shame, posting not only strong earnings, assisted by impressive cost control, but also a manageable increase in bad debts. Deposits had also posted a healthy rise. The capital placement has taken BOQ's tier one capital ratio above eight per cent - in line with the majors - and analysts expect the share price discount to the majors should now begin to close.
BOQ attracted two broker upgrades to buy in the wake of its result - from Credit Suisse and ABN Amro - leaving a 2/3/1 ratio among those having updated their views. BA-Merrill Lynch (with a view of underperform) still holds concerns regarding the bank's reliance on non-retail forms of funding.
FNArena