Two weeks ago, GSJB Were conducted some "look through" analysis to the other side of the peak of the bad debt cycle in the first half of FY10, and decided recovery prospects for the banks were pretty healthy. Nevertheless, the smaller ANZ and NAB were set to outperform the larger Westpac and CBA.
This week it has been UBS' turn to look toward recovery, suggesting signs of economic stabilisation mean the market is now starting to do just that. To that end the UBS analysts have ranked each of the Big Four on asset quality, tier one capital, provisions for bad debts, earnings recovery, efficiency, capital dilution, legacy issues and valuation metrics. However the analysts stopped short of creating a final points table, believing investors would value different risk/reward criteria.
They found CBA to be the lowest risk bank for the cautious investor. Westpac rates well, with earnings set to get a boost from the St George integration. However St George also provides Westpac with greater property exposure and dilutes return on equity. NAB was the lowest on valuation metrics, and is the most leveraged to recovery given its low starting point. ANZ has the most baggage, but valuation is cheap and tier one capital is sound.
So again we see the larger CBA and Westpac appearing as the lower risk bet, but with more limited recovery upside than the more risky NAB and ANZ. In NAB's case, UBS asks whether the bank might release value by "shrinking to greatness", which is no doubt a reference to the troubled UK assets the bank obviously wishes it had never acquired. For ANZ, upside will be enhanced or otherwise by how well it spends its money in Asia.
UBS sees 2010 being the bottom of the bank earnings cycle before a sharp recovery in 2011.
In the shorter term, Morgan Stanley also suggests Westpac and CBA have the lower risk profiles and points out they may both receive a material tier one capital benefit if they can achieve advanced Basel II accreditation of St George and BankWest respectively from the Australian Prudential Regulation Authority. NAB has the highest risk weighting, but joins Westpac and CBA in the potential to increase tier one capital by 40-80 basis points if their standard portfolios achieved advanced accreditation
ANZ, however, has little opportunity for more than a 20 basis point increase, Morgan Stanley suggests. ANZ has a higher risk corporate loan portfolio and more exposure to unsecured consumer lending.
Morgan Stanley is not included in the FNArena broker universe, but rates (in order of preference) Westpac at Equal Weight, CBA, NAB and ANZ at Underweight. While the above commentary is analysing the banks in an absolute sense, Morgan Stanley's ratings reflect a shorter term view relative to the index benchmark.
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