Upgrades For Oz Bank Earnings Continue

This story features ANZ GROUP HOLDINGS LIMITED, and other companies.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

A major theme in Australian equity research over the past week has been upgrades to the banking sector (see FNArena: The Banking Sector Wrap, 31/07/09 and More Upgrades for Australian Banks, 03/08/09). It initially started by Citi and has now been followed up by the likes of GSJB Were and (to a lesser extent) JP Morgan. Now RBS Australia has joined the list of stockbrokers turning more positive on the sector.

The broker’s latest analysis suggests the Australian recession is unlikely to be as deep as it had previously feared, meaning a better than expected outcome for the major banks in particular with respect to the level of bad debts.

With such debts now unlikely to spiral out of control, RBS suggests in the absence of any further acquisitions, the repairing of bank balance sheets that has been undertaken via capital raisings in recent months is all but complete. To reflect this, the broker has upgraded the sector to Neutral, taking the view sector underperformance has now run its course.

Changes to earnings forecasts reflect this as the broker has lifted its FY10 and FY11 estimates by 15% across the sector, driven by reductions to its forecasts for bad and doubtful debts. The changes flow through to increases in price targets, with ANZ Bank’s ((ANZ)) target rising to $20.50 from $12.84, Commonwealth Bank’s ((CBA)) to $37.64 from $30.83, National Australia Bank’s ((NAB)) to $26.98 from $18.82 and Westpac’s ((WBC)) to $22.11 from $18.45.
 
The higher forecasts, added to the view the recession is unlikely to be as deep as the broker had previously thought, leads RBS now to suggest the market’s focus will be turning to recovery. This implies the share prices of the banks are unlikely to return to the lows hit around March of this year, especially given the earnings downgrade cycle is either close to ending or has stabilised.

Assuming such an outlook, RBS has also changed its ratings in the sector as it takes the view under a recovery scenario the best plays are ANZ and National Bank as these two offer the most upside. This is based on its view these two banks will emerge first from the bad debt cycle given they have greater exposure to Phase 2, being Corporates and SMEs, and less exposure to Phase 3 of the cycle, this being consumer loans.

To reflect this, RBS Australia has upgraded both ANZ and National Bank to Buy ratings from Sell previously, while Westpac remains a Hold and Commonwealth continues to score a Sell rating. This compares to the ratings for each bank in the FNArena database, which on a Buy/Hold/Sell basis show ANZ scored as 6/3/0 with one restricted, CBA at 1/5/4, National Bank at 5/4/1 and Westpac at 2/6/2.

RBS Australia’s increases to share price targets sees the average targets in the FNArena database increase to $18.88 for ANZ, $40.56 for CBA, $25.56 for NAB and $22.09 for Westpac from $17.93, $39.70, $24.65 and $22.09 respectively.

Compared to these average targets, ANZ’s share price is currently at a premium of better than 7%, CBA is at a premium of around 12%, National Bank is at a premium of a little more than 3% and Westpac is at a premium of around 5.5%. Note that revised target prices by Citi, GSJBW and RBS are above today’s share prices.

Shares in all four of the banks have continued their runs today and as at 11.20am ANZ shares were up 35c at $19.35, CBA shares were 62c higher at $44.27, National Bank stock was up 49c at $25.44 and Westpac was 27c stronger at $22.37.

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