The four major banks outperformed the index this week (ending Thursday), marking an average 2.9 per cent increase to a 1.5 per cent lift in the ASX 200.
The week began in a familiar dour mood for the broad market but spirits were lifted following a big one-day rally on Wall Street on Tuesday. Financial stocks led the rally in the US, spurred by a (spurious) claim from part-nationalised and arguably insolvent Citigroup that the bank registered an operational profit in both January and February (before write-downs).
The two bigger banks of the big four - Westpac and Commonwealth, which are deemed to be of sounder balance sheet - were the stars for the week, posting five per cent gains. ANZ limped in with a 1.5 per cent gain while National didn't much trouble the scorer.
Among the analytical output from investment banks on the sell-side it was left to head bull BA-Merrill Lynch and head bear ABN Amro to once again air their differences. Last week Merrill lifted its banking sector rating from neutral to overweight, arguing that the margin outlook for the big four had never been better. This week the analysts took time to reiterate their stance, suggesting healthy margins on commercial and housing lending will offset the headwinds of higher bank funding costs in the 2009 financial year.
Last week ABN Amro (underweight for some time) argued that any revenue improvement would be offset not by funding costs specifically, but by increasing bad debts. It's a bit of a coin toss: Merrill believes bad debts will not reach heights that will undermine revenue growth from increased market share, while a more pessimistic ABN looks to 1992 for reasons to believe bad debts in the GFC are only just beginning to grow. It will all come down to just how bad the recession in Australia becomes.
And don't believe we are not now in a recession.
This week ABN decided to attack the left-hand side of the equation, suggesting that while the big four are indeed enjoying improved revenues at present, the joy is not likely to last. Again the analysts turn to the experience of the 1990s.
In 1990, as Australia began to tip into recession following the crash of 1987 and subsequent crash in commercial property, the Australian pillars were enjoying excess revenue growth of seven per cent, ABN notes. By the tail end of the recession, revenue growth had fallen to six per cent below average. With corporations likely to pull in their capital expenditure, the analysts expect lending to slow and revenue growth to become "anaemic". Bad debts will peak in the 2010 financial year, the analysts suggest.
On an individual bank basis, ABN has decided that NAB's exposure to the basket case that is the UK, along with the still unresolved issue of toxic CDOs on the balance sheet, provides enough risk concern to prompt a downgrade from hold to sell. ABN's target price falls from $18.96 to $14.97.
The good news is that relative price movements see ABN upgrade Westpac from hold to buy, but with little change in target. This puts Westpac streets ahead with five buy ratings in the FNArena database, ahead of NAB with two, and ANZ and CBA with one each. (Note that ratings reflect current share prices against target prices and not necessarily overall quality).
Macquarie Group also came in for an upgrade this week with Aspect Huntley lifting its already positive view by one notch to buy, from accumulate. Macquarie shares remain the target of shorters, who continue to find ways around the ban on shorting financial stocks in Australia. No coincidence thus that both Macquarie and Suncorp-Metway shares enjoy more buy ratings than all other banks outside Westpac: it's not quality, but the larger price discount that makes up the big difference.
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