Weekly Broker Wrap: Bank Assessment And Telco Calls

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By Andrew Nelson

All in all it was a pretty good bank reporting season just gone. However, analysts at Deutsche Bank point out that there were numerous one-offs and non-recurring bonuses that made things look a little better than they were. Stripping these out give us a slightly different picture as to who did the best and who did the worst.

Looking at headline results, the broker notes growth in the Australian and NZ franchises of Australia’s major banks looked reasonably strong in 2H12 at an average of 5-11% annualised. On these numbers, Westpac ((WBC)) posted the strongest growth followed closely by National Australia Bank ((NAB)).  Conversely, ANZ Banking Group ((ANZ)) seems to have posted the weakest growth at a headline level.  However, Deutsche points out that the drivers behind that growth were very different, with NAB relying heavily on low costs, while WBC actually posted stronger revenue growth.  

Thus, NAB takes the biggest hit from stripping out the chaff, with the broker noting that in the absence of a mortgage re-pricing catch up, markets income, fee re-pricing and the non-payment of executive bonuses, the 2H result was actually a flat over the 1H.  This leads the broker to conclude the momentum that is assumed in the bank’s domestic performance is probably not as the headline numbers suggest.

On the other hand, the broker’s analysis points to ANZ as having had the strongest underlying performance, with Australian and NZ franchises booking 5% annualised growth versus Westpac at 1.2% annualised growth. However, the broker gives extra credit points to the latter, noting WBC posted the result despite undertaking some balance sheet restructuring over the period.  Unsurprisingly, NAB comes in at the bottom booked with adjusted underlying growth at 0.2%.

Over the end of the period, analysts at UBS conducted a survey of bank Loan Officers in order to gauge the current trend of underwriting standards, credit demand, loan growth and lending margins.

Firstly, respondents noted that there has been an ongoing tightening of underwriting standards in both mortgages and SME lending. While the broker believes this is mainly due to re-pricing efforts in the mortgage sector, it sees a little bit more to be concerned about in the SME space. Respondents indicated concerns about the general economic environment and worries about the housing market as the main driver for tightening lending conditions to small businesses. UBS points out this is the first shift towards restricting SME lending since 1H10.

The tightness also spread to larger business customers as well, with loans to the corporate sector also showing some signs of restriction, especially in retail property. The broker notes this tightness emerged as both stricter collateral requirements and a focus on loan maturity.

Despite a slowly decreasing willingness to lend, the broker points out that the general opinion in the sector is that credit growth is expected to come in at 5% next year, which is up from the 4% indicated in the last survey. There were fairly conflicting responses on asset quality, with expectations ranging from further improvements to deteriorations.

Ultimately, UBS expects bank prices will remain volatile, torn between outbursts of optimism when the clouds part to show some sunshine, which will be offset by the realities of a struggling Europe, the US Fiscal Cliff and what are still anaemic levels of global growth. As such, the broker believes the fair value range for the banks is at around 1.4x-1.8x book value. Right now, the Big-4 are sitting at the top of this range on the back of the hunt for apparent safety and yield. Yet despite the yield support on offer, UBS is growing increasingly concerned about valuation and thus sees better investment opportunities elsewhere, especially in international markets.

BA-ML also took an angle on banking last week after holding a number of mini-conferences around Asia. The big surprise, notes the broker, was the extent of bullishness towards equities, Asia, and HK/China.  In fact, 58% of respondents believe equities will be the best performing asset class in 2013. Only 14% felt that way about gold, and only 13% for corporate credit. In terms of equities, Asia is expected to be the best performing region, with the US coming in a distant second.

94% of survey respondents see a soft landing for China, with worries about a hard landing seeming to have disappeared.  On the other hand, earnings growth has remained a concern. It seems about half of respondents believe 2013 earnings growth forecasts of 8% are about right, while 42% of respondents  believe earnings growth is at least 10% too high. Still, about 75% of investors surveyed believe the China H-share market will rally into year-end and then continue into next year. 60% expect HK/China to be the best performing country in the region versus Australia and India coming in the lowest.

Switching lanes back to the domestic front, analysts at JP Morgan see a softer, if not more rational market for domestic telecommunication providers. The view is predicated by the recent result from SingTel’s ((SGT)) Optus, which reported some reasonably weak numbers and took the knife to guidance. Revenue guidance for the  year ending March 13 was cut from low single digit growth three  months ago to a mid-single-digit decline, although the operating earnings guidance was maintained at flat.

The broker has its doubts about flat earnings, however, noting things don’t really seem to have improved that much over the last three months. And with things about the same, JP Morgan wonders how margins could be supporting even flat earnings in the face of weaker general trends.

Thus, the broker reads this shift in guidance as likely indicating an increasing emphasis on earnings over market share, with the company not looking to fight revenue headwinds, but rather targeting margins. This would mean the loss of subscribers in Mobile given Telstra’s ((TLS)) network lead, with Optus using price to shift customers off pre- to higher margin postpaid accounts.

While for Optus this amounts to a struggle, for Telstra it is a clear positive, says the broker. In fact, current trends point to Telstra picking up 760k subs this half versus 606k in the June half, with the iPhone5 launch adding further upside risk to the numbers. Analysts at Goldman Sachs agree, also seeing a strong quarter for Telstra on the back of a weak Optus performance in the mobile market.
 

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