Australian Banking Sector Update

Submitted by Craig Strzelecki on 27 April, 2007 - 12:01

Sharemarket analyst has provided an Australian banking sector update: the analyst maintains a Sector Overweight position over the banking sector: Today's ANZ 1H07 Result saw forecasts re-affirmed with the analyst's forecasts. They expect ANZ EPSg of 12.9% (07E) and 11.1% (08E), unchanged post result. Key result drivers (pcp) were credit growth of 10%, margins -6bp, Non int income g of 13%. Revenues were up 9% and costs up 4%. Key issues were (1) Institutional div'n: cost blowouts and revenue lag (2) uncertainty over quality of cost g (3) BDD outlook. Sector EPS upgrades important to continue price performance: ANZ kicked off interims, with SGB, WBC, NAB yet to report. Given strong performance of banks YTD +10%, particularly Apr, ongoing EPS upgrades are necessary to maintain price outperformance. Sources of upgrades: (1) 15% run rate on credit growth (2) strong WM environment (3) low BDD given strong economy. Sector risks (1) BDD deterioration (2) price competition (3) sector rotation. The analyst has a preference for ANZ, CBA and WBC all having a Buy 1 broker call. ANZ: Looks cheap at 6% sector discount: (1) retail banking division growing 15%+ p.a (2) good execution (3) capex spend above peers. CBA: Also looks cheaper at a 1% sector premium. Key Drivers: (1) Improving customer lead indicators (2) business bank & WM upside (3) retail register (4) ex WM PE a standout. WBC: Volume growth recovery is driving EPS recovery & TSR catch-up after long lag. NAB on track but looks more expensive (Neutral 1) NAB: (1) Earnings momentum on track (2) capital flexibility (3) but valuation is less attractive at 6% premium. A previous Australian Banking Sector update.

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