Australian Banking Sector Update

Submitted by Craig Strzelecki on 23 April, 2007 - 18:14

Sharemarket analyst UBS has provided an Australian Banking Sector Update. They have observed a strong reporting season expectations driving outperformance: The banks' reporting season starts this Thursday 26th with ANZ. The analyst expects this to be one of the strongest reporting seasons in several years, with 1H07E EPSg of 8.7% (seq) driving FY07E EPSg of 13.8%. Earnings risk remains on the upside. They expect the banks' outperformance to continue through this reporting season. Revenue growth should be the highlight of the results, expected to be up 5.2% (seq). This is a result of ongoing strength in credit growth, better than expected deposits, margins holding up (albeit stock specific drivers) and strong Wealth Management earnings. Credit quality remains strong, with BDD charges to rise with volumes. This was confirmed in CBA's 3Q update on Wednesday. ANZ should deliver a strong, good quality result. Revenue growth will be the feature, especially in Personal Banking. Costs will rise given reinvestment, while BDD should be up given volumes and fewer recoveries. The analyst remains overweight on the banking sector with ANZ, WBC and CBA all having a Buy 1 broker call. Key drivers to the banking sector identified by the analyst: (1) the economy is healthy, (2) credit growth is strong, (3) bank revenue growth is accelerating, and (4) credit quality remains sound. They believe bank valuations remain attractive, particularly at a 77% relative PE to Industrials.