Treasure Chest: Westpac Upgraded Against Commonwealth Bank

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

By Greg Peel

The Buy, Hold and Sell or equivalent recommendations set by brokers are in almost all cases with reference to “the index”, which may be the ASX 200 or some other variation thereupon (See: Recommendations Explained). JP Morgan differs, however, by setting recommendations relative to the sector in which a stock resides, rather than the broad market. Hence the JP Morgan analysts’ Overweight, Neutral and Underweight ratings are to be taken in a sector context, and JP Morgan’s equity strategists then apply recommendations to each sector relative to the market.

JP Morgan downgraded Westpac ((WBC)) to Underweight, relative to its peers, back in October last year ahead of the bank’s FY12 result. The broker upgraded Commonwealth Bank ((CBA)) to Overweight in May this year, after Westpac, ANZ Bank ((ANZ)) and National Bank ((NAB)) reported their interim FY13 results. Westpac, ANZ and NAB operate on an end-September financial year while CBA operates on a more standard end-June financial year.

The broker downgraded Westpac in October because it was concerned over the bank’s intention to lift its dividend payout in the face of a subdued earnings outlook. In May, Westpac went one better and offered up a special dividend while ANZ surprised the market with a payout increase. At the time, CBA offered a trading update but no dividend news, meaning investors would have to wait until August to learn what dividend surprise this bank might have in store. CBA reports on August 14.

JP Morgan has been recommending Underweight WBC and Overweight CBA since May, with the former having made its dividend announcement and the latter yet to do so. Sure enough, Westpac has underperformed the bank index over the period by 5% and underperformed CBA by 7%. History suggests that while CBA has long maintained a premium over the other Big Four banks, the relative spread between the Big Two of CBA and Westpac never gets too far out of whack for too long.

JP Morgan believes the time is nigh for the spread to revert, and also believes sufficient CBA dividend anticipation is now built into the CBA share price. Hence today the broker has upgraded Westpac to Overweight from Underweight and downgraded CBA to Underweight from Overweight.

Again it must be appreciated: this is a bank sector call not a market-relative call. Indeed, in the longer term, JP Morgan is concerned over the capacity for Westpac to grow earnings on a relative basis when its mortgage rates are higher than the other three banks’. The broker also notes tax benefits accruing from the St George consolidation will run out after FY14. But in the shorter term, Westpac’s tier one capital ratio is higher than the other three banks’ and at 8.7%, higher even than WBC’s own 8.5% top-end target. Thus, suggests JPM, another special dividend could well be on the cards come November.

Macquarie also upgraded Westpac, last week, and in doing so also cited the bank’s recent relative underperformance against peers. Macquarie suggests that given WBC’s aforementioned high mortgage rates that the market is now assuming the bank would start trimming margins in order to win back mortgage business. But Macquarie does not subscribe to this view, suggesting management will likely take its time on balancing out its business mix.

Westpac is now showing three Buy or equivalent ratings in the FNArena database, two Holds and one Sell. By contrast, CBA now shows one Buy rating, two Holds and five Sells.
 

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