Recommendation Upgrades For ANZ

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            [1] => ((WBC))
            [2] => ((NAB))
            [3] => ((CBA))
            [4] => ((SGB))
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            [0] => ANZ
            [1] => WBC
            [2] => NAB
            [3] => CBA
            [4] => SGB
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This story features ANZ GROUP HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: ANZ
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Given earnings performance within the major stocks in the Australian banking sector tends to be fairly similar in the absence of any company specific issues, share price performance is also relatively similar over the medium-term.

This means it is unusual for any major valuation differences to open up between stocks in the sector, so as Citi notes one way of achieving outperformance is by going overweight the bank offering the highest yield and or the lowest P/E (price to earnings ratio).

At present this stock is ANZ Banking Group ((ANZ)), with both Citi and GSJB Were recognising a valuation discount in the stock and upgrading it to Buy from Hold this week.

On Citi’s numbers the bank has underperformed the sector by 10% so far this year and has been flat in absolute share price terms, such that it now offers both the highest yield and the lowest P/E.

GSJB Were’s figures are even more attractive as it estimates the bank is currently trading on a FY08 P/E of just 12.2x and offers a yield of 5.4%, putting it at a 16% discount to its peers. 

This means the market is pricing in either a $15 billion equity issue or a 10% downgrade to FY08 earnings estimates, neither of which appears likely in the broker’s view. It suggests there is actually very little downside risk to earnings this year as its estimates factor in little recovery in the Institutional Banking division and no major gains in terms of the group’s Asian growth strategy.

Citi also suggests the concerns over the bank’s moves to expand in Asia have been overplayed, as new CEO Michael Smith has experience in the region thanks to his time with HSBC and shows few signs of overpaying with respect to potential acquisitions.

Domestically the broker also sees little to justify the current share price discount as in its view the outlook for the Australian banking sector is solid and it sees the bank as being able to build on its strong revenue growth in FY07.

GSJB Were’s forecasts show a similar story, the broker forecasting earnings to increase from FY07’s 205.1c to 224.3c in FY08 and 241.4c in FY09 while Citi’s estimates are 222c and 246c respectively. Both brokers appear to be adopting fairly conservative forecasts as consensus estimates stand at 230c and 248c, while median forecasts according to Thomson One Analytics are 230c and 249c.

Following the two upgrades the FNArena database shows the stock as rated Buy three times, Accumulate and Sell once each and Hold five times, with an average price target of $31.25.

Along with Westpac ((WBC)), ANZ is now trading at the largest discount to average price target in the sector of around 8% based on yesterday’s closing price, while National Australia Bank ((NAB)) is at a discount of close to 2% and Commonwealth Bank ((CBA)) and St George Bank ((SGB)) are at slight premiums.

Shares in ANZ this morning are higher in line with a stronger overall market and as at 11.05am were up 45c at $28.83.

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