Banking Sector Update

Submitted by Craig Strzelecki on 6 March, 2007 - 19:02

Analyst, UBS maintains Overweight over the the Australian banking sector. The revenue outlook for the Australian banks appears strong and seems to be on track for 8% growth in FY07E (which would be the strongest revenue growth in 10 years). The recent CBA & BEN results and ANZ's trading statement all showed revenue growth above trend levels. This is being driven by (1) 15% credit growth (2) 10% growth in household deposits (3) Good fee income, esp in business (4) Underlying margins holding up. Banks attractive at 77% PE relative. As markets turn more defensive, the analyst expects the Australian banks to see further 'relative safe haven' buying. Sector asset quality remains very strong, in our view, with NPL's only 41bp (no exposure to the US sub-prime). Sector PE is now 12.8x (08E) which is in the middle of its historic range, while the PE rel looks more attractive at 77% (to All Industrial ex Financials). UBS have rated the following banks ANZ, WBC and CBA with a Buy 1 Share Trading Recommendation with good earnings momentum. ANZ: Is considered cheap at 5% sector discount: (1) retail banking division growing 15%+ p.a (2) good execution (3) capital expenditure spend above peers (4) earnings upside. CBA: Also cheaper at a 1% sector premium. Key drivers: (1) Improving customer lead indicators (2) business bank & WM upside (3) retail register. NAB on track but more expensive. WBC: Volume growth recovery should drive EPS recovery & TSR catch-up. NAB: (1) Earnings momentum on track (2) capital flexibility (3) but valuation is less attractive at 5% premium.