The ASX 200 finished the week (ending Thursday) up 2.4 per cent, with most of the rise a result of a big jump on Tuesday following an extraordinary night in the US. The big four bank stocks underperformed the index on average, falling 0.2 per cent; however underperformance was almost entirely due to Westpac.
Westpac's shares fell 4.1 per cent over the week while National rose 1.7 per cent, ANZ added 1.3 per cent and Commonwealth added only 0.3 per cent.
The banks have been leaders in the rally, spurred on by the US banking sector, so it comes as little surprise that banks should find the going tougher now as the rally appears to stall. However, a falling US dollar has meant an ongoing surge in commodity prices (most notably oil) which has provided the resources sector with good reason to outperform this week.
The reason for Westpac's lonely demise this week is simply one of premium. For a long time, Westpac and CBA have been viewed as the two higher quality banks in comparison to the more flighty ANZ and NAB. The GFC only served to widen this gap, as the former two were less exposed to GFC-related problems and single name implosions than the latter two.
CBA was Australia's biggest bank until Westpac bought St George, while CBA's purchase of BankWest has not been enough to regain the prize. Either way, Westpac and CBA are together much bigger banks by capitalisation than ANZ and NAB.
Size and security matters in banking, and this gap has been enough to ensure Westpac and CBA have long traded at PE premiums to ANZ and NAB. But as the GFC unfolded, analysts became increasingly concerned that CBA was being overly complacent. While Westpac was doing the right things to shore up its balance sheet and provide for bad debts, CBA was leaving itself uncomfortably exposed. Even ANZ and NAB, with more troublesome exposures, were addressing their problems more realistically.
To that end, bank analysts soon began suggesting CBA no longer deserved its premium to ANZ and NAB. They relegated CBA to the least recommended stock of the Big Four on a relative basis. Westpac, on the other hand, remained deserving of a premium, the analysts believed. Westpac has thus been number one choice (on a net basis) of the brokers and advisors in the FNArena universe for many a moon.
But not any more.
This week BA-Merrill Lynch downgraded Westpac from buy to hold and upgraded ANZ from hold to buy. With that move, Westpac's buy/hold/sell ratio fell from 3/6/1 to 2/7/1 while ANZ's rose from 2/6/2 to 3/5/2 making ANZ the preferred pick of sell-side analysts.
The reasons for Merrills' downgrading of Westpac are shared by many of the firm's analysts' peers.
Two factors stood out in Westpac's recent interim result. Firstly, it had not succumbed to big-name implosions as much as the others had and secondly, the bank had enjoyed an enormous boost to financial market trading profits given the opportunities provided by the volatility of the GFC. Analysts all agreed that the focus has now shifted to the extent of small names on loan books and their potential demise, and that the opportunity for such extraordinary trading profits has now likely passed. In other words, Westpac has come "back to the pack".
Westpac also inherited a more troublesome loan book (without much in the way of deposits to back it up) when it acquired St George. St George was more of a low-end player, while Westpac has always been a significant institutional player. It is loans to SMEs and consumers which are now the most under threat as the recession deepens and unemployment rises. Westpac is in no better position than others in terms of exposure, even if its provision levels and capital ratio are superior. Westpac no longer deserves a premium to the extent it has enjoyed.
And that is why it was Westpac in particular, rather than the Big Four in general, which underperformed the index this week.
The analysts nevertheless maintain CBA as fourth choice (1/5/4), just beneath NAB at third (1/6/3). For CBA, it is a case of a premium also now being unjustifiable, particularly given it has the lowest level of provisions against bad debts among the group, and considerably so.
In justifying its upgrade of ANZ to buy however, Merrills cites a bad debt provision more comfortable than NAB plus "lower headwinds", which largely relates to NAB's exposure to the UK. It also noted ANZ is not facing such an impending drop off in trading profits as Westpac might be, given it was never a big player in the first place (less profit to lose) but it does have the upside of opportunity in Asia.
Merrills also notes that in price/forward earnings terms, Westpac is trading at 10.7x, CBA at 9.6x, NAB at 9.5x and ANZ at 8.1x, suggesting ANZ stock has been the most heavily beaten down and thus is now showing relative value. The opposite is true for Westpac.
This now leaves NAB looking a little vulnerable. As at close of trade on Thursday, CBA was trading roughly in line with its average target price while Westpac was trading 3.3 per cent below and ANZ 2.9 per cent below. NAB, on the other hand, remains at a 3.1 per cent premium to its average target.
This was the news in a week otherwise devoid of anything meaningful from the banks themselves. However, bank investors may care to take note of the importance of this coming Sunday.
This Sunday marks the expiry of the recent extension to the government's ban on the short-selling of bank stocks. While politics might dictate this is a ban that should be held in perpetuity, the reality is there is little to justify a further extension.
Apart from growing disquiet among the professional investor fraternity, Australia is now a lone figure in such a ban, while the share market rally suggests the time for fear of a "run" on bank stocks has passed. Assuming the ban will be lifted, Macquarie this week aired its views on the potential outcome.
There is no longer as much scope as there was when the ban was extended for the rest of the world to sell Australian banks short on an "absolute" basis. In other words, to "naked" sell banks in the sense this is a lone trade rather than a relative trade in which some other stock or sector is bought on the other side of the trade.
The outlook for Australian banks has "improved considerably" over the past few months, the analysts suggest. (Bear in mind that Macquarie is the most bullish on banks of all the brokers in the FNArena universe.)
However, there is plenty of scope for the world to sell Australian banks and buy banks elsewhere - the "relative" trade. While Australia is only now starting to feel the pinch of a recession - of slowing credit growth, rising bad debts and rising unemployment - the US, UK and European economies have already suffered several quarters of weak operating conditions, and already two consecutive quarters of negative GDP. In other words, if you pay any heed to the old technical definition of a recession, Australia is yet to have one while the rest of the world certainly has.
This means that while Australian banks have little room to improve in value markedly from here, other world banks do. Across the globe supposed "green shoots" are appearing, and that sets the scene for further improvement in the values of global banks that have been beaten to near surrender by the GFC. On that basis, Macquarie warns of the danger of Aussie banks being short-sold by global players.
Or the government may decide to extend the ban. But it would probably look foolishly parochial if it did.
20090522 banking wrap tab
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