Weekly Broker Wrap: Bank Bubble, Cautious Consumer, Tested Telecoms

This story features BENDIGO & ADELAIDE BANK LIMITED, and other companies. For more info SHARE ANALYSIS: BEN

-Has the bank bubble evaporated?
-Discretionary spending still weak
-Deutsche Bank prefers logistics, some AREITs
-Telecoms mature, mobile margin focus
-Plasma market is robust
 

By Eva Brocklehurst

Australian banks were in bubble territory at the start of the year but are they there now? Bank shares, having been buoyed by the chase for yield, have fallen sharply since the beginning of May and the sector returns are down 14%. UBS finds bank stocks are still not cheap, but valuations are less stretched. The case for an aggressive underweight stance may have run its course. The banks are now much closer to their global peers in terms of return on equity versus the price to book ratio, with the exception of Commonwealth Bank ((CBA)).

From here, catalysts will be centred around the macro view, with one of the key risks being a slowdown in the Australian economy and weak employment. Ongoing Australian dollar weakness and the ratcheting back of the US Federal Reserve's quantitative easing will also play a part. Support, in UBS' view, will come from further cuts to the cash rate from the Reserve Bank, a sustained pick up in the housing market and domestic investor rotation back to the sector as a "least worst" alternative.

In retracing the bank territory, UBS has decided to upgrade ANZ Bank ((ANZ)) to Buy from Sell. Bendigo & Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)) are upgraded to Buy from Neutral. ANZ's operations are performing well while the regional banks offer more upside now. ANZ is viewed now trading at a more appropriate 11.2 times price earnings and 1.6 times book value. The upcoming appointment of a new head of international and institutional banking could be critical to the stocks rating as well. UBS believes this appointment, most likely from a large Asian bank, must satisfy the market by further developing the super regional strategy and the person be seen as a potential successor to the CEO.

Bendigo and Adelaide Bank offers upside in UBS' view as the network matures while there is leverage to improved equity and debt markets. The risk centres on the very thin provision coverage. Bank of Queensland, on the other hand, offers a more classical bank turnaround opportunity as it works through legacy issues. The risk here is exposure via its mining leasing book.

Australia's bank stocks have typically been a safe haven in times of currency volatility. The unwinding of the yield trade and the renewed search for growth has signalled the flight-to-safety is less prevalent now. Macquarie notes the banks outperformed the market up to April 2013, driven by the yield trade and their safe haven status. Since then the banks have underperformed, driven by short selling and a turn away from yield to seeking growth. Macquarie thinks further de-rating may occur as the yield trade unwinds, but the banks are expected to restore their safe haven status in the ASX200 universe in the medium term.

Consumers are not co-operating. Spending growth has dropped below trend and the response to lower interest rates has been muted. Largely, in Deutsche Bank's view, because of how slow the rate cutting cycle has been. Discretionary spending growth in value terms has dropped below 2%. FY14 could be better as unemployment expectations look to have stabilised and an upward trend in wealth may encourage consumers to lower their savings rate.

Deutsche Bank believes growth in discretionary spending is close to recessionary levels, with a softening in both goods and services. Cars and gambling are the two items that have held up well. Early evidence is pointing to a resumption of spending on services such as travel and eating out, rather than on retail items. If this continues, it is likely to be a replay of 2010-12 where spending held up but retailers saw little benefit.

Spending on essentials, meanwhile, is growing around trend. What stands out is the large rise in the price of utilities. This relates to a large price increase in September 2012 at the time of the carbon tax introduction. When this cycles through, Deutsche Bank expects spending on utilities will track lower, allowing growth to pick up elsewhere. It will likely be food. Food inflation has been at historically low levels and an uptrend is now in place.

From all of this Deutsche Bank maintains a gaming exposure in stocks, and with firming air travel continues to hold Sydney Airport ((SYD)). Without an improvement in retail spending, the broker sees better options in logistics and those retail AREITs that have exposure to services spending. Consumer staples are viewed as expensive. The broker remains of the view that monetary policy is yet to have its maximum impact. The quantum of official rate cuts has been small and gradual relative to history. A further cut of 25 basis points to the cash rate is expected by September, which should buoy sentiment.

Australia's telecommunications industry is mature by various measures, one such being total telecom revenue as a percentage of GDP, which is 2% according to Morgan Stanley. The broker is not expecting a significant increase in total telecom revenue as a percentage of GDP but thinks the mix will change, with mobile increasing share as PSTN revenue moves to zero and the NBN builds. This sector has had one of the highest earnings revisions in the last three months. Positive revisions for the smaller names have been driven by consolidation of the broadband sector and resulting synergies.

The sector currently offers an average 5.3% dividend yield and a 1.9% spread to 10-year Australian government bonds, which should be sustainable over the medium term. Morgan Stanley highlights Telstra's ((TLS)) metrics in this regard, being 2.7% spread to the 10-year bond with a 6.1% dividend yield. Hence, for Morgan Stanley the sector offers investors an alternative to investing in bonds and the broker has a constructive view on Telstra because of these metrics, plus the exposure to mobiles.

Australia appears to be around one year behind the US in Smartphone penetration and Morgan Stanley expects earnings margin expansion through the Australian mobile sector for scaled players. There is increasing focus on mobile profitability in the US industry, and Australia appears to be following suit, a factor that the broker suspects is not well appreciated by the Australian market.

Plasma prices have risen again and this industry is upbeat on a global basis, with demand continuing unabated. UBS hasn't seen two price increases in the same year since 2007 and this is being read as underscoring a robust industry. US albumin prices have firmed to US$37-38 per vial and prices are expected to head towards US$40/vial in 2014. The past high point was US$50/vial but this is considered unlikely to be reached this time around. CSL's ((CSL)) collections are growing around 12%. The major risk facing CSL, in UBS' view, is changes to the plasma market dynamics and weakness in the prices that CSL is able to set for it products.
 

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