Bank Upgrade And Broker Conviction

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Macquarie bank analysts believe the market is missing an important point. While much has been said lately about rising bank funding costs, which FNArena has covered extensively, consensus has Australian banks hamstrung by the upcoming election. In an environment of pending financial regulatory change, analysts have assumed the banks will not risk the ire of candidates for government by raising mortgage rates beyond a now steady RBA. Bank bashing is an easy election tactic.

But Macquarie notes that the election will soon be held. The banks have been trying to balance out what they can't pick up on mortgage rates with increases to business lending rates, but business credit demand is still falling. Westpac's ((WBC)) recent five-year funding deal cost the bank 135 basis points compared to 100 basis points in November, given the interim blow-out in spreads affected by the European debt crisis. Unless the banks move on mortgage pricing immediately after the election, Macquarie suggests the consequences would be significant. There is simply too much margin pressure.

Hence the analysts believe mortgage repricing is just around the corner. Westpac and Commonwealth ((CBA)) moved early on securing fresh funding late last year, the analysts note, leaving ANZ ((ANZ)) and National ((NAB)) behind. Westpac and CBA have also been trying to slow asset growth in the face of funding increases, while the smaller two are trying to grow their loan books. This means ANZ and NAB face upside funding pressure in FY11, while the Big Two are looking at downside.

On that basis, Macquarie has put both CBA and Westpac on Outperform, meaning an upgrade for Westpac from Neutral. The broker leaves ANZ on Neutral, and is currently restricted from making a recommendation on NAB. But now that bank PE multiples reflect a loss of sentiment, Macquarie has also taken a knife to its target prices. The analysts have lowered their Westpac target by 10%, ANZ by 11% and CBA by 17% from earlier lofty levels.

The move also means ANZ now drops off the broker's conviction list, replaced by CBA.

On Outperform conviction, Macquarie retains Boart Longyear ((BLY)), News Corp ((NWS)), QBE Insurance ((QBE)) and Rio Tinto ((RIO)), but Qantas ((QAN)) has been removed. The broker has Brambles ((BXB)) on an Underperform conviction.

Moving into the commodity space, Canada's RBC Dominion Securities has updated its global sector and stock recommendations.

With sovereign debt risk still hovering around Europe, RBC remains Overweight precious metals. It's too early to say whether the spot uranium price has bottomed, but recent corporate events and government acquisitions are enough for an upgrade to Market Weight for the uranium sector.

RBC believes base metal stock valuations remain attractive despite concerns over the global economic recovery, so Market Weight is retained. But with China tightening its fiscal and monetary policies, steel, iron ore and coal prices are under pressure. The broker has moved to Underweight the bulks.

Lower crop yields in the US mean RBC has downgraded the fertiliser sector to Underweight.

In relation to Australian listed commodity stocks, RBC has added Equinox Minerals ((EQN)), Newcrest Mining ((NCM)) and Paladin Energy ((PDN)) to its “20 best stock ideas” portfolio and dropped Minara Resources ((MRE)).

Already on the list and staying put are Aquarius Platinum ((AQP)), Avoca Resources ((AVO)), BHP Billiton, ((BHP)) and Coal & Allied ((CNA)).

RBC's portfolio lost 17% in the June quarter, in line with the MSCI World Metals & Mining Index. But since its inception in late 2008, the portfolio has returned 27% to the index's 6%.

Morgan Stanley notes that small cap stocks, as a group, tend to rise and fall in 18-24 month cycles irrespective of a turn in large cap stocks in the interim. Small caps have been underperforming for 10 months only now, meaning more underperformance is on the cards. Price/earnings ratios are not yet cheap, the analysts suggest.

That does not mean all individual stocks within the small cap sector must react in unison, and Morgan Stanley has today added four littluns to its model portfolio. They are Mineral Resources ((MIN)), Automotive Holdings ((AHE)), Campbell Bros ((CPB)), and SMS Management & Technology ((SMX)).

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