It was a bad week for global stock markets and a bad week for Australian banks. The ASX 200 finished down 4.7 per cent for the week (ending Thursday) but the big four banks fell 5.2 per cent on average. Commonwealth Bank was hardest hit, dropping 8.3 per cent.
The week began after ANZ announced a 25 per cent dividend cut.
GSJBWere noted that each of CBA, National Australia Bank and Westpac had recently made suggestions that no dividend cuts would be forthcoming at this stage, but the analysts have decided to "call their bluff" and make dividend reduction assumptions in their forecasts for the 2009 financial year of around 20 per cent across the board regardless. This results in only a 12 per cent cut for CBA as it has already posted its interim result.
In 2010, Were's is suggesting banks will revert to their long-run average levels of dividend payout, suggesting a 15 per cent drop for CBA, 14 per cent for NAB, seven per cent for Westpac, and 15 per cent for ANZ which the broker had already assumed following the bank's dividend cut announcement.
The analysts believe the stigma has been removed from bank dividend cutting in the current environment and that the ANZ lead may well be followed.
ANZ notably enjoyed a solid rise in share price the day of its dividend cut, until global sentiment took over. Should the bad debt situation deteriorate further, Were's suggests, dividend forecasts could be further reduced. Cuts in dividend mean greater retained earnings on bank balance sheets.
On the earnings front, the January 2009 credit growth figures provided some welcome news in an otherwise dour climate. While annual system credit growth fell back to 6.1 per cent in January from 6.5 per cent in December, bank credit growth was plus one per cent compared to minus two per cent in December.
The big four are growing their lending books at about twice the pace of the system, notes BA-Merrill Lynch, reflecting market share increases following the withdrawal of foreign bank operations and the market's abandonment of non-bank lenders. UBS notes CBA and Westpac are the winners in mortgages while ANZ and NAB are performing best in business loans.
The banks were spared the need to make a mortgage rate decision this week when the RBA left the cash rate on hold at 3.25 per cent. Had the RBA cut, and the banks not matched the extent of the cut as warned, bank margins would have seen a slight improvement.
But every cut represents a worsening economic climate irrespective of making loans more "affordable". Cash rate cuts also force deposit rate cuts, and the banks would not like deposit rates to become even less attractive.
Finding funding at a reasonable price is what the game's all about at present. And with the TD Securities monthly inflation gauge showing a rise in February, the cash rate is already negative in real terms.
The banks will not be looking forward to any further rate cuts, although economists are unanimous in expecting as much. Consensus has 2.30 per cent as a target for the bottom of the cycle.
Despite rate cuts and global financial crises, the Merrill's banking analysts suggest the 2009 margin outlook for the big four is "the best in years", and that the 2010/11 outlook is also better than average. More expensive offshore funding provides a headwind but locally the banks have put them themselves into a position to enjoy healthy earnings growth (before provisions for bad debts).
This margin outlook, the outlook for trading income, and efforts by the banks to cut costs has led Merrill Lynch to upgrade its sector call on the banks to overweight. The broker has retained a neutral rating since September.
The Merrill analysts have also adjusted target prices to account for the margin update, raising Westpac, ANZ and CBA by between $1 and $2 and lowering NAB by $1.10.
In contrast to the FNArena database average rankings, Merrills rates Westpac (buy) as top pick ahead of ANZ (neutral), CBA (neutral) and NAB (underperform).
Note that ratings are relative. An overweight call on the bank sector simply implies the banks will perform better than other (unstated) sectors. It does not imply the banks must rise in share price, although well they may.
And just when you thought everything might just be a bit rosier on the banking front, ABN Amro came along and poured its usual bucket of cold water over proceedings.
The ABN analysts have applauded sector dividend cuts (including amongst the regionals) but maintain that the 2010 financial year is only going to get a whole lot worse. Bad debts will scupper any expected revenue uplift, the analysts suggest.
Credit Suisse noted one surprising theme in the January banking statistics from APRA. The Australian government has largely accepted the big bank view that foreign banks will be scaling back their lending operations in Australia due to their own troubles at home.
Yet the RBA noted no sign of this in its latest statement on monetary policy, and the latest APRA figures further confirm that any such scale-bask is yet to occur.
The APRA figures do confirm that the local banks have picked up market share in lending, but they have lost ground in share of household and corporate deposits.
There were no individual ratings changes from brokers in the FNArena database among the big banks this week. Average targets saw only the mildest of movements.
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FNArena closely monitors views and recommendations by RBS Australia (formerly ABN Amro Australia), Aspect Huntley, Citi, Credit Suisse, Deutsche Bank, GSJB Were, JP Morgan, Macquarie, BA-Merrill Lynch, and UBS. The above mentioned Buy/Hold/Sell ratio is based upon the recommendations by these ten local experts. The ranking is as a result of the ratios. The average target price is an average of each of the broker's target price where available.
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