Last week the Big Four Australian banks significantly underperformed the ASX 200, falling an average six per cent to the index's one per cent rise. This week the tables have reversed somewhat, with the index breaking through the January 2009 high to jump 4.2 per cent, while the Big Four averaged a 5.1 per cent share price increase.
Last week's underperformance was entirely due to half-year profit reports from National and ANZ. Both banks posted solid results on the revenue line, as expected, but analysts were taken aback by the extent of increase in bad debts. NAB was forced to make a large increase to its bad-debt provisions, while ANZ sat tight on already extensive provisions.
The market became suddenly worried that bad debts were increasing in the recession faster than first thought, and that they could only get worse. The market also assumed Westpac, which reported this week, and Commonwealth, which will provide an update next week, would be suffering similar fates.
The falls in Australian bank share prices were also assisted by some temporary weakness in US bank stocks as the release date of the US stress tests approached. However, not only was the release date extended from Monday to Thursday (or this Friday morning AEST), various reports citing "sources close to the Treasury" popped up, implying something of a controlled leaking of information ahead of the release.
And the market liked what it heard. US banks would indeed need more capital, the leaks suggested, but not from the government. They would be told to increase their common equity capital bases through either issues to the private sector or through the conversion of preferred stock. US bank stocks have once again soared this week.
Australian bank stocks thus quickly shrugged off heightened market fear and outperformed once more. Westpac issued its half-year profit report into a buoyant market and it was well received. Westpac finished up 5.8 per cent for the week ending Thursday, erasing most of its losses from last week. NAB surged back 7.2 per cent, while ANZ managed 4.6 per cent and CBA limped in with 2.8 per cent.
Westpac's result was slightly below consensus on the earnings line, but after disappointing results from NAB and ANZ this was actually a blessing as far as the market was concerned. The theme continued - Westpac was forced to make significant increases to provisions following a big jump in bad and doubtful debts.
It was not that Westpac's previous provisions were deemed insufficient by analysts. Westpac had managed to avoid most of the fall-out from earlier big-name credit explosions and had little exposure to toxic assets or any other nasties. But the bad debt increase sparked by the recession has moved into Phase II - that of a wider spread of medium and smaller, faceless borrowers hitting the wall.
Westpac was previously more biased towards institutional banking and the larger end of town, but since the St George "merger" the bias has now shifted towards the smaller end. The bank has also increased its relative exposure to commercial property.
Westpac management is expecting the recession to mean a continuing increase in bad debts in the second half. It is not getting any argument from bank analysts. But for bank analysts, Westpac's result highlighted disadvantages and advantages for Westpac in comparison to its peers.
The disadvantage is that a lack of exposure to big names, a record money market trading profit in the first half, and a general perception of being Australia's "best" bank was not going to help Westpac much from here. The purple patch of big bank market share growth is over and credit growth in general will continue to decline. Bad debts will continue to rise and the St George loan book will offer significant exposure. It's just a matter of whether Westpac, or any bank for that matter, is sufficiently prepared to tough it out.
In Westpac's case, analysts suggest the bank's demonstrated risk management superiority is a big advantage. Westpac has increased its provisions to a peer high of 122 basis points of credit risk-weighted assets.
ANZ did not raise its provisions this time around because it was comfortable with 106 basis points. NAB did make a big increase, but at only 89 points analysts are still concerned the bank is underprotected and overexposed. CBA is deemed to be a safer bet, but analysts also despair at its low provision of a similar 89 points.
Following a dividend cut, as expected, and as all three reporting banks have now executed, Westpac's tier one capital ratio of 8.37 per cent is best in show.
To a handful of analysts, Westpac is still their number one pick. But there is a general concern that Westpac has long enjoyed a decent share price premium to its peers, and despite a superior level of risk management that premium is no longer justifiable. As far as declining credit growth and increasing bad debt growth is concerned, Westpac is right there in the pack for the second half and beyond.
There was, however, only one change in recommendation following the Westpac result. Credit Suisse had been among the more bearish of analysts and had held a Sell rating, but this week upgraded to Hold. This leaves Westpac still secure at the top of the FNArena table, showing a 3/6/1 ratio of Buy/Hold/Sell ratings from brokers in the FNArena universe.
Research house Aspect Huntley this week downgraded NAB from Accumulate to Hold following its assessment of last week's result. This moves NAB to 1/6/3, and shifts the ratio of net Sell ratings on the Big Four to 9 against 7 Buys. (We consider Accumulate as Buy.)
Westpac also drew some price target reassessment from the brokers. One or two edged theirs up on the "good" result (or more realistically to re-rate for improved overall market sentiment), although there was one reduction. But JP Morgan, which has long held an Underweight (Sell) rating on Westpac within the banking sector, quietly increased its target an astonishing 39.5 per cent, from $15.81 (almost lowest in the range) to $22.06 (now highest), while maintaining Underweight.
As regular readers of this column know, bank share prices had become stretched above broker targets and it is the share prices which always come back in the end, just as they did last week. But Westpac's average target price has this week jumped a net 6.4 per cent. With no target changes to other banks, Westpac is now trading 1.5 per cent above its average target and ANZ 4.8 per cent. NAB has begun to be stretched again at 6.8 per cent while CBA remains high at 7.8 per cent.
We await the results of the US bank stress testing due early on Friday morning AEST. Given US bank shares have run very hard on leaked result rumours, one wonders if there is much immediate upside from even a good result. A not-so-good result may, however, invoke a bad reaction from an exuberant market.
This week ending Thursday also included the release of Macquarie Group's full-year profit result. Former CEO Alan Moss was the master of understating guidance, and so Macquarie results almost invariably "surprised" to the upside. But in new CEO Nick Moore's first year, Macquarie shocked the market and fell short of guidance.
It was not a particularly significant miss, but no one much can remember if this has ever happened before. At the end of the day analysts were not overly concerned, merely suggesting that it will still be tough times ahead for Macquarie as well.
Macquarie, too, is suffering from a reduction in asset quality, and despite constantly having declared its balance sheet sound, the bank made a rapid $540 million institutional placement at $27.00 as an accompaniment to the result. It was put away without fuss.
Analysts were forced to reduce earnings per share estimates for Macquarie on dilution, but the shares still managed to close 5.1 per cent higher for the week, with the market satisfied with a bit of extra balance sheet strength. The average broker target price fell 3.7 per cent, meaning Macquarie shares are now 14.5 per cent above the target. (FNArena's bank target rule is proven only for the Big Four, though experience has taught us that price targets in general tend to pull at share prices moving beyond and higher.)
20090508 weekly wrap tab
FNArena