Australia | Nov 13 2006
By Chris Shaw
A week is a long time in the market, with the latest example of this being the change in views of brokers towards the Australian banking sector. Last week the sector as a while was viewed as relatively expensive and there was no clear favourite among the major banks, but the latter at least now appears to be changing with Westpac (WBC) emerging as the sector’s top pick.
GSJB Were and Macquarie were two to make the move last week to a higher rating, Weres upgrading the bank to Outperform, L/T Hold from Marketperform and Macquarie to Outperform from Neutral. The move was in response to what Weres suggested was a valuation gap between Westpac and the other majors, as on its estimates the stock last week was trading at an 11% discount to the sector based on forecast FY07 earnings.
At the same time the broker has reduced its exposure to both ANZ Banking Group (ANZ) and St George Bank (SGB), while moving its overall exposure to the banking sector back to Neutral. Despite this, it sees little downside risk to sector earnings given its forecast for solid housing lending growth in the Australian market. Macquarie’s move was also in response to the bank’s valuation to the sector.
ABN Amro has joined the chorus today by upgrading its Westpac rating to Buy from Hold, suggesting it now has the most upside potential of the major banks. The broker notes the company has enjoyed good volume growth in recent periods and expects this to begin to flow through into stronger earnings particularly in FY08 and FY09, resulting in the stockbroker increasing its earnings per share estimates in those years by 2.2% to 203.9c and 3.5% to 222.2c. Thomson One Analytics shows median earnings per share forecasts for FY08 and FY09 currently stand at 196c and 207c.
ABN too agrees the bank is at a discount to the sector currently, as on the broker’s FY07 earnings forecast it is trading on a P/E of 13.1x and a yield of 5.3%. ANZ is the closest of the majors on a P/E of 13.5x, while St George is on a P/E of 15.4x on the broker’s estimates.
Merrill Lynch presents a similar case in its review of the sector by highlighting Westpac as the best value on both P/E and dividend yield measures. It estimates the stock is at an 8% discount to the sector, while ANZ, National Australia Bank (NAB) and Commonwealth Bank (CBA) are all at premiums. Its other recommendation is for switching some exposure from National to St George, as again this is seen offering better value in the broker’s view.
The trend towards Westpac as the preferred sectoral pick was reflected in share price performance over the past week, as the stock was the best-performer in the sector in rising more than 3%. This compares to an average result of a 1.3% fall for the major banks, which compared to a 0.4% fall in the broader market.
The FN Arena database shows Westpac is now rated as Buy five times and Neutral five times, while its Sentiment Indicator reading of 0.4 is the best in the sector. In comparison, ANZ and St George score Sentiment Indicator readings of 0.2, National is at 0.1 and Commonwealth is at minus 0.1.
The upgrades for Westpac have also given it a new average target price of $25.10, up from $24.77 last Friday. The increase reflects the higher target price of ABN Amro, the broker lifting it to $27.88 from $25.20. The median price target according to Thomson One is $23.80.
Westpac shares today are stronger, as at 12.20pm the stock was up 29c at $24.97. Among the other banks ANZ was 12c higher at $28.65, Commonwealth was up 59c at $48.15, National was 77c stronger at $39.38 and St George was up 23c at $33.82.