Following an up and down week (ended Thursday) the ASX 200 finished down 1.5 per cent while the Big Four banks underperformed again on average, down 2.9 per cent. Once again relative strength in the resources sector would have played a part but, again, Westpac was the big loser, falling 5.1 per cent. Westpac's sizeable equivalent Commonwealth was down 4.6 per cent while of the two lesser banks, ANZ fell only 1.6 per cent and National led a charmed life, down only 0.1 per cent.
Westpac has been relatively hammered since analysts have decided there is little now (other than size) to separate Westpac from the pack in terms of growing bad debts among SMEs and, soon, consumer loans. On that basis, analysts have suggested Westpac no longer deserves its premium. The market has been ensuring that premium has been given a seeing to. CBA is the other afforded a premium, so it also came somewhat back to the pack.
Analysts have recently been doing a bit of work on market "dispersion" - the relative price/earnings ratios between those stocks considered large and safe and those considered small and risky. They have noted dispersion is currently as wide as it's ever been, suggesting that under the current climate of slightly increased confidence, the likelihood is the dispersion gap will begin to narrow again. Before you even argue relative bank premiums, this analysis suggests the gap between Westpac and CBA on the one hand and ANZ and NAB on the other should narrow, and indeed it has been doing so.
As it stands now however, in relation to average broker targets, Westpac has fallen to be 8.7 per cent below its average target, CBA is 5.0 per cent below and ANZ 2.5 per cent below while NAB continues to buck the trend at 3.0 per cent above. These numbers include a two per cent target reduction for ANZ this week given its dilutive capital raising (more on that in a moment). Looking at these aggregate broker figures thus suggests part of this premium/dispersion gap may already have been dealt with.
There were nevertheless two changes to ratings this week. Aspect Huntley upgraded Westpac from hold to Accumulate, which FNArena counts as buy (although AH does have a higher rating of "buy"). Following the ANZ capital raising and its update on the bad-debt situation, Citi upgraded ANZ from sell to hold, believing uncertainty risk surrounding capital and acquisition plans had been settled.
The end result of these movements is we now have a dead heat at the top. ANZ took over from Westpac last week with a more positive buy/hold/sell ratio but Westpac has now fought back. This week they have both ended up with ratios of 3/6/1, ahead of NAB on 1/6/3 and CBA on 1/5/4. The only broker to now hold a sell rating on Westpac and ANZ is RBS, which is the most bearish on the sector of all the FNArena brokers and has a sell on all four banks.
On a net basis, the ratio of buys to sells on all of the four has improved to 8/9 from 7/10 last week.
RBS continued its chicken little theme this week as it reiterated its bad debt growth warning and added a new twist of the potential for a government-mandated reduction in fees. The Reserve Bank of Australia this week published a report on banking fees, which found that more than 20 per cent are "punitive", that is, fines for overdraws and so on. RBS believes the regulators may take the banks to task on such charges in the current environment, using the government's capital guarantees for leverage. Lord knows such a move would be politically popular.
RBS already believes the banks will yet have to raise even more capital to offset bad debt growth, and a loss of fee revenue would only expedite this necessity.
On the subject of bad debts, Credit Suisse pointed out this week that bad debt cycles usually peak six months after GDP bottoms out, six months after impairments (loans falling delinquent) peak and three to six months before the trough in business credit growth. This is all well and good but none of any of that has happened yet. Nevertheless, Credit Suisse's equity strategists expect business credit to trough in June 2010. This puts the bad debt peak in the first half of 2010, although the stock analysts themselves are still more inclined to aim for the second half.
The good news is, cutting through a lot of figures and acronyms, that CS does not expect bad debts to become unmanageable in relation to the banks' current balance sheet strength. In other words, CS disagrees with RBS.
It was Suncorp's turn to update the market on its bad debt position this week, and the news was not good. Having only recently shrugged off bad debt growth in earlier commentary, Suncorp announced it was increasing guidance on its charge on total loans from 100-130 basis points to 125-145 bps. This was enough to send Suncorp shares down 9.3 per cent for the week, but the majority of brokers suggest such bad debt growth is already factored into the price and that Suncorp is still offering good value on the takeover potential of either division. Only BA-Merrill Lynch (the only sell) disagrees.
ANZ also updated the market on its bad debt position this week. Impairments had increased by 20 per cent, but this did not bother too many brokers given (a) it is to be expected and (b) ANZ is relatively well provisioned. What was more important is that the announcement accompanied notice of a $2.5 billion institutional placement and $350 million retail share purchase plan.
That ANZ should turn to the market for more capital was expected. ANZ's tier one ratio had fallen behind the peer average (8.17 per cent to 8.4 per cent) and analysts were subsequently braced. However, the extent of the raising was a surprise, as was ANZ's brazen claim that the money was partially to be used were it to win a bid for some Royal Bank of Scotland's Asian assets - a bid it had already submitted. Such a pre-emptive capital raise is very cheeky indeed.
As one door closes, another one opens, and thus while analysts agreed the raising announcement reduced the risk surrounding (a) whether ANZ might raise and (b) whether ANZ might try to buy something more in Asia, they went on to suggest the bank has now introduced (a) acquisition risk and (b) the risk the bid fails and all that new capital sits idle on the balance sheet. Damned if you do, damned if you don't.
All up, analysts were mostly pleased with proceedings, particularly Macquarie, which suggested the discount offer represented "extremely" good value. RBS - the Australian branch of the same bank ANZ is trying to buy Asian assets from - was the most negative.
Macquarie has long seen the Aussie banks through rose-tinted glasses, and there is no change to that attitude this week. While RBS is the only broker with four sells, Macquarie is the only broker with four buys (Outperform). It was, however, Macquarie which warned us this week that Aussie banks were overvalued in comparison to their international peers. GSJB Were reiterated that call this week, agreeing that foreign economies are further through their recession cycles, making foreign (particularly US) banks more attractive than Aussie banks at present.
The importance of this measure is the potential for Aussie banks be to be short-sold as an international "pairs" trade now that the shorting ban has been lifted. Bank stocks all fell on Monday on the news of the lifting, but we can't know whether that was actual shorting or selling ahead of the shorting which may yet occur. Either way, the Big Four have not exactly been trashed this week, although Macquarie Group is looking a bit victimised, having lost 10.8 per cent.
Credit Suisse made the interesting observation that ANZ management probably decided on its "unconventional" raise-first, acquire-later tactic to avoid its shares being short sold on any naked acquisition announcement.
20090529 weekly wrap tab
FNArena