Australian Banking Sector Update

Submitted by Craig Strzelecki on 14 September, 2007 - 11:51

Australian stock market analyst UBS has provided an Austrlian banking sector update. They have earmarked Westpac (WBC) as the key Buy recommendation in the banking sector. Westpac (WBC) is their key buy post the appointment of Gail Kelly as CEO of Westpac (starts Feb-2008). Key positives noted by the analyst: (1) Gail Kelly brings experience in Retail/SME, area of underperformance for (Westpac, (2) efficiency programme likely to be similar to SGB, (3) SGB’s loyal register base may follow ex-CEO, (4) early signs of turnaround in NZ.Key risks for WBC: (1) loss of key executives, (2) Gail has limited Institutional experience. ANZ has limited downside at 8% PE discount to peers, upside possible as noted by the analyst. They believe ANZ is structurally sound but dragged by near-term concerns. Key positives noted by the analyst for ANZ: (1) cheap, in our view (2) best performing retail bank, (3) record of delivery, (4) new CEO Mike Smith (starts Oct) is well respected in mkt, (5) de-risked book. Key risks for the ANZ stock.: (1) loss of key executives, (2) Insto div needs more fix than first thought (08 turnaround), (3) need to demonstrate value in $1.8bn of Asian investments. The analyst has observed that NAB has a consensus risk driven by premature earnings extrapolation: They remain cautious on NAB given aggressive consensus earnings estimates (c4% above UBSe in 2H07). Key positives for the NAB stock: strong Aussie business bank, (2) some cost upside, (3) potentially accretive acquisition given PE arb to UK. Key risks for NAB: (1) PE-de rating as it is no longer a turnaround play, (2) ROA is not reverting to system given - structural differences, management targets and UK margin pressure. Finally the Commonwealth Bank of Australia (CBA) is a turnaround play according to the analyst but the stock is not cheap at 7% sector premium. Key positives for the CBA stock: (1) Captial Expenditure (capex) spend is increasing without comprising EPS growth, (2) retail turnaround provides upside to FY08, (3) register short squeeze. Key risks for the CBA stock: (1) not cheap at 7% premium, (2) Retail gains may not materialise, (3) trading rev risk.

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