Banking Sector: ANZ & WBC Short-Term Value Ideas

Australian sharemarket analyst Macquarie Research Equities (MRE) has some short term value ideas in the banking sector: ANZ & WBC. Rotation amid the rising bond yield environment saw the banks underperform last week. The sector ended the week up 0.2% (adjusting for SGB's dividend), while the cyclicals drove the market up 1%. Among the majors, NAB performed the best, rising 0.9% last week. The worst performer was WBC, closing down 0.8%. Though all three regionals finished in positive territory, they still underperformed the broader market. BEN finished up 0.6%, ADB and BOQ ended up 0.3% and 0.2% respectively. Positive outlook for Westpac’s Institutional Briefing could narrow the value gap: With Westpac Institutional Bank's (WIB) first half result already surprising on the upside and a strong 2H contribution expected from the specialised capital division, the analyst expects management to deliver an upbeat message regarding the full year outlook for this business at its presentation tomorrow. While this may not be sufficient to drive meaningful upgrades at the group level given WIB's 17% share of group earnings and the 15% growth, the analysts have already factored in for WIB, and it may provide sufficient confidence to reverse some of WBC's recent underperformance. This is particularly the case given that if one backs out the wealth operations of each of the majors, WBC’s banking operations are now the cheapest in the sector by a significant margin. Accordingly, while CBA remains the anaysts' key medium-term pick in the sector, the analysts have added WBC to ANZ as short-term value ideas. Will ANZ's prominent appointment encourage WBC to look external: ANZ surprised the market a little last week by appointing such an experienced international executive as its next CEO. While not suggesting WBC's board will be influenced by this move, some may see this as putting pressure on the WBC board to also seek a prominent external candidate. In the analysts' view, and assuming the board remains committed to its current Asian strategy, WBC need to focus more on executives able to execute strongly in the domestic market. A particular challenge for WBC will be finding someone able to take the retail bank to the next level, while also bringing a strong understanding of the evolving challenges in institutional banking. Major bank preferences unchanged: 1) CBA, 2) WBC, 3) ANZ, 4) NAB, 5) SGB. Regional preferences unchanged: 1) ADB, 2) BOQ, 3) BEN.