Australia | Jul 25 2006
By Chris Shaw
Despite the recent increase in official interest rates in Australia and the market’s expectation of a further rise in August, there has been little talk regarding the likelihood of an increase in bad debts impacting on the banking sector.
ABN Amro has looked more closely at the issue and suggests an increase in bad debts across a limited range of industries could have a minor impact on bank sector earnings if the higher bad debt scenario plays out.
It sees the potential for loan defaults as increasing among grape growers as oversupply continues to drive down margins, while small builders may begin to feel the heat from slower economic activity. The broker also sees the potential for problems in the print media industry, as it appears to be in a long-term decline thanks to increased usage of the internet.
Translating this to the banking sector, the broker notes Commonwealth Bank (CBA) appears to have the greatest potential exposure in that about 12% of its commercial clients would fall in the high-risk category. Given the increased likelihood of higher bad debts the broker has trimmed its earnings forecasts for the major banks by as much as 1.5% in FY07 and 2.3% in FY08, resulting in slight decreases to valuations and price targets.
There is no change to its pecking order among the major banks though, with National Australia Bank (NAB) its preferred exposure and only Buy rating, with a target price of $40.29. ANZ Banking Group (ANZ), Commonwealth, St George (SGB) and Westpac (WBC) are all rated as Hold with respective target prices of $27.67, $41.11, $30.27 and $23.83.
The FN Arena database shows market consensus seems to favour St George and Westpac. Both are rated as Buy three times and Hold seven times with respective target prices of $30.49 and $24.37. ANZ is rated as Buy twice and Hold eight times with an average target of $28.36. After these three, the differences in opinion become more pronounced: National receives three Buy ratings, one Sell and six Holds and has an average target of $36.32, Commonwealth is rated as Buy three times, Sell three times and Hold four times with an average target of $43.90.