Banking Sector Update

Submitted by Craig Strzelecki on 27 March, 2007 - 18:13

Market analyst, UBS, have aa Australian banking sector update: The Banking Sector is currently trading on 13.3x (2008E). This looks attractive relative to the market, with a PE Rel (All Indust ex Fin) of 76%. However, if the analyst looks at the implied PE of the banking divisions (ex Wealth Mgmt) the Sector is on 12.6x or a 27% discount to the market. (Valuing all bank's WM divisions at a 10% disc to AMP.) The marke analyst believes this implies (1) Banks are cheap. They are one of the few sectors in the market that have not re-rated over the last two years. And/Or (2) Banks' wealth management (WM) divisions are being fundamentally undervalued by the market, trading at very large discounts to pure plays like AMP (18.8x), AXA (18.2x) or PPT (19.0x). The five large banks control 50% of system Retail FUM (administrator's view). Excluding Wealth Management divisions, both CBA and ANZ's Banking Divisions are the cheapest in the sector at 12.4x (2008E) or a 3% sector discount. WBC also looks attractive at 12.6x or a 2% discount. NAB continues to trade on a material 6% premium on 13.5x. The analyst remains Overweight on the banks including ANZ, CBA, WBC all have a Buy 1 share recommendation. The analyst sees upside risks to their 07 forecasts. The economy is healthy, credit growth is strong, bank revenue growth is accelerating, credit quality remains benign. They believe bank valuations remain attractive, especially cheap WM exposure.

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