Another Tale Of Two Banks

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    [0] => Array
        (
            [0] => ((CBA))
            [1] => ((MQG))
            [2] => ((SUN))
            [3] => ((NAB))
            [4] => ((ANZ))
            [5] => ((WBC))
        )

    [1] => Array
        (
            [0] => CBA
            [1] => MQG
            [2] => SUN
            [3] => NAB
            [4] => ANZ
            [5] => WBC
        )

)

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies.
For more info SHARE ANALYSIS: CBA
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Much of the action in the Australian stock market is centred around the banking sector at present. Last week brought a warning from the Commonwealth Bank ((CBA)) that analyst consensus was underestimating the bank’s expected first half revenue in the order of 20%. This was a bright bit of news when held up against a later guidance downgrade from Macquarie ((MQG)) and a heavily discounted capital raising from Suncorp-Metway ((SUN)). While analysts remain wary of CBA’s bad debt provisions, they were largely happy to take management’s admonishment as a sign that perhaps all the Big Four’s forecasts might need some reconsideration.

CBA’s interim profit result is due on Wednesday, being a June year-end accounter, while the other three all run on a September year-end and will not report interims until April-May. It may have been that analysts were going to have to wait some time to adjudge whether CBA’s better than expected revenues were indicative of all of the Big Four, except that last week National Australia Bank ((NAB)) offered a trading update, as it has now promised to do on a regular basis. ANZ Bank ((ANZ)) has made no such promise, but a sharp drop in share price has drawn a “speeding ticket” – a please-explain – from the stock exchange.

The Big Four can pretty much be split into a less risky pair – CBA and Westpac ((WBC)) – and a more risky pair – NAB and ANZ. But Buy/Sell recommendations from analysts depend on whether share prices are currently reflecting that risk correctly or whether valuations are over- or underdone. Last week the banking analysts at Citi issued a report suggesting NAB and ANZ were 20% riskier propositions than Westpac and CBA and this was not sufficiently reflected in their share prices.

The trading update from NAB was a case of good news – bad news. The good news is that analysts were right to extrapolate CBA’s 20% profit growth and assume NAB might be able to boast similar success. Business lending, more so than mortgages, has been the winner as borrowers flock back to the security of  the Big Four. Some analysts were forced to further raise their revenue expectations for NAB.

The bad news, however, is that bad debts are also on the increase. While the Australian business is so far muddling through relatively well once you get past “three big names” (we assume ABC, Centro and B’n’B), the UK is a country heading into deep recession and bad debt growth has begun to reflect as much. NAB is still in profit for the year in the UK, but only just and probably not for much longer. New Zealand, on the other hand, is a basket case.

There is little disagreement that NAB, unlike CBA, has provisioned conservatively for bad debts ahead. Throw in the positive revenue result and half of the analysts in the FNArena database believe that the provisions should provide a comfortable “cushion” against a worsening economy. The other half, however, just sees things getting worse – and much worse in the UK.

It is for that reason that many analysts will not rule out either a dividend cut or capital raising or both ahead. This comes despite assurance from management that the bank’s tier one capital remains “comfortably above 8%”. There is further uncertainty provided by a new CEO and by speculation as to what the strategic review – due for release on March 12 – will bring.

Macquarie and Deutsche Bank are the most optimistic of the bunch, maintaining Buy ratings on NAB. Credit Suisse is the only Sell (Underperform), leaving the rest with Hold positions. The average target has slipped today from $23.20 to $21.79 – some 13% above the current traded price

For ANZ, by contrast, there was little good news to be found. Analysts assume from the CBA update and now the NAB update that Westpac, too, will have enjoyed better than expected revenue growth on the basis of volumes, margin management and trading gains. Not so for ANZ. Management has announced first half revenues will only be “modestly” better than the first half 2008.

Unlike the other three, ANZ still has a big problem trying to reduce costs in order to boost revenue potential. The blame has been laid at the feet of the bank’s Asian operation – an expansion that is currently proving ill-timed. NAB and ANZ were also the two of the Big Four most exposed to the further write down  in  valuations on dodgy credit derivatives, but while NAB’s conduit is currently showing no further losses, ANZ is facing $500m of negative impact in the first half from credit risk on said derivatives.

Like NAB, ANZ has put away a lot of provisioning against bad loans, but while the bank’s position again looks relatively comfortable it will come down to just how bad bad loans might become. Without the same revenue improvement buffer of the other three, ANZ is not out of the woods on the bad loan front.

The same dividend/capital considerations thus dog ANZ, and Citi, for one, has come straight out and suggested ANZ will cut dividends by 20% and raise $2bn of capital in the second half. JP Morgan, to quote another, believes the current dividend payout ratio is “affordable” but only provided there is no bad debt deterioration.

JP Morgan is, however, the only broker prepared to put a Buy on ANZ, although it is strictly an Overweight rating within the sector. Credit Suisse is again the only Sell (Underperform) with the rest of the field on Hold. The average target has today fallen from $16.05 to $15.37 – 18% above the traded price.

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