Australia | May 14 2007
By Chris Shaw
With the major banks having completed their interim profit reporting period it seems timely to review the results and assess whether anything has changed in terms of stock broker views on the sector or towards the sector as a whole.
Taking a larger picture view first, ABN Amro points out the recent profit results were characterised by a lack of wholesale upgrades, meaning results were good but only as good as expected. This leads the broker to suggest the sector is fully priced at current levels, as P/E (price to earnings) ratios range from 14.1x for ANZ Bank (ANZ) to 16.8x for St George, while yields are just below the 5% level on average.
GSJB Were estimates average earnings upgrades following the profit results were in the order of 0.1% to 1.8%, Westpac (WBC) enjoying the highest upgrade and St George (SGB) the lowest. Macquarie suggests results were on average about 0.5% better than expected but slightly lower in terms of quality.
In its view National Australia Bank (NAB) delivered the most disappointing result in the sense upgrades to consensus had been priced into the stock but these failed to materialise. As a result it has downgraded the stock to Neutral from Outperform, at the same time cutting its profit forecasts by around 1.5%.
In contrast it has upgraded Commonwealth Bank (CBA) to Outperform from Neutral, pointing out it is the only one of the major banks to offer a combination of value, turnaround potential and the likelihood of earnings upgrades in coming months.
The scope for upgrades rests largely on the fact the market is pricing in earnings growth at levels lower than its peers while the broker expects it to match the other banks, meaning consensus estimates are likely to move higher. When the stock is also trading at a 6% discount to its peers on an ex-Wealth management basis, the broker sees enough supportive factors to justify the upgrade.
GSJB Were’s analysis generates a different result, the broker seeing Westpac as the top pick in the shorter-term and National Australia Bank as number one in the longer-term. St George is expensive in the broker’s view, so it suggests a switch out of the Dragon and into Westpac at current levels. Investors interested in the Westpac dividend need to be quick though, as the stock goes ex-dividend on May 17th.
While Credit Suisse also prefers Westpac and National Bank, ABN Amro has a slightly different ranking as while Westpac is its number one the broker has moved CBA up to the number two spot in preference to ANZ. National comes in last as the broker suggests the lack of any earnings upgrades with its result last week suggests a more difficult year ahead, especially as the leverage it has enjoyed from cutting costs fades.
Merrill Lynch also favours CBA over National and suggests investors reallocate exposure away from NAB given CBA’s more attractive yield and lower P/E, while Westpac remains its pick as the best value idea in the sector.
The broker continues to recommend being overweight the sector as a whole, pointing out the earnings momentum remains good and while P/Es are at record levels they remain reasonable relative to the broader market.
According to the FNArena database the earnings reports of the banks led to a few rating changes, with ABN Amro downgrading ANZ to Hold from Buy based on a lack of positive catalysts, Macquarie as previously noted and JP Morgan upgrading CBA to Outperform from Neutral, Macquarie downgrading NAB to Neutral from Buy, Merrill Lynch and JP Morgan both downgrading St George to Neutral and Macquarie downgrading Westpac to Neutral.
Based on broker recommendations as they now stand Westpac remains the most preferred in the sector as calculated by an FNArena Sentiment Indicator reading of 0.5, while the average target price of $28.36 suggests 4.0% upside from Friday’s close. Next is Commonwealth with a 0.4 reading, while its average target of $54.18 implies just over 1.0% upside from Friday’s last sale.
Next comes ANZ with a 0.3 reading and 3.5% upside based on its price target of $31.50, while National and St George lag the others with readings of 0.1 and 0.0, the average price target for St George suggesting almost 3.0% downside from current levels.