The weekly wrap 2: banks the cheapest sector in the market

Citi's change of heart fits in almost perfectly with recent research conducted by FNArena that clearly shows that while bank shares have continued trading above consensus price targets since late March this year, on a two-year (FY10 and FY11) comparison against the rest of the share market, taking into account projected earnings per share growth, price-earnings multiples and implied dividend yields, banks remains relatively the cheapest priced sector in the market.

This apparent relative undervaluation is not only the result of unusually high dividend yields (projected between 5.6 per cent and 7.2 per cent on FY11 estimates - see also below) but also because of widespread expectations among stockbroking analysts that earnings per share across the sector will make a big jump forward in two years' time.

On current projections, which include the latest changes implemented by Citi analysts, ANZ will see hardly any growth between FY09 and FY10, but FY11 should see EPS jump by some 30 per cent - potential successful acquisitions in Asia not included.

National Australia Bank is expected to report an EPS decline of more than nine per cent in FY10, but this should be followed up by a jump of no less than 37 per cent in FY11. For CBA, current projections are for minor growth in FY10, followed by an advance in the order of 35 per cent. Westpac currently enjoys the most modest market expectations with FY10 EPS expected to show no growth and FY11 to deliver EPS growth of circa 28 per cent.

On current projections, ANZ shares trade at an implied FY11 dividend yield of 6.7 per cent, NAB at 7.2 per cent, CBA at 5.6 per cent and Westpac at 7.0 per cent. This appears to be at odds with Citi analysts' assessment that all prospects seem near similar for shares of the four Big Banks in Australia, with the analysts suggesting ANZ and NAB might have some relative catching up to do with CBA and Westpac.

What goes for the Big Four, at this stage does not apply to regional banks Bendigo and Adelaide Bank (BEN) and Bank of Queensland (BOQ). Both are  anticipated to grow by single digit or mid-teens only, in each of the next two years. Even Macquarie Group's (MQG) prospects seem quite modest compared with present expectations for the Big Four. Consensus is anticipating no growth in FY10 and "only" a 25 per cent jump in FY11 EPS.