Australian Banking Sector Update

Submitted by Jim Thesiger on 5 May, 2008 - 20:49

Here is the Australian Banking Sector Update from sharemarket analyst Macquarie Research Equities.

Australian Banking Sector Update

Post WBC: to CP or to SP?

1H08E Sector EPS g -5.7% seq. Core earnings solid up 5% seq.:

With NAB & SGB due to report next week, Sector Cash EPS is on track to be -5.7% seq. Core earnings appear more solid up 5% seq. Key drivers seq: (1) mgns -10bp, (2) strong vol growth 9.5%, (3) weaker fee income 2.9%, (4) BDD up 17bp to 37bp of loans, (5) lower tax rate 27.9%.

Mixed messages on provisions, expect further capital raisings:

Asset quality: (1) WBC Collective Provision top up $31m vs ANZ $121m & NAB $200m, but WBC Specific Provision charge was large at $198m. (2) WBC first to indicate consumer stress (rising delinquencies), (2) NPL's up 42% seq vs sector up 30%, (3) sector provisions pre-tax 86bp of RWA (3) "stressed expected loss provisions" 100bp to RWA, ANZ (109bp) & WBC (110bp) appear close. We expect other banks to raise hybrids and/or undertake drp underwrites.

NAB all in the outlook. SGB already guided to profit pre-provisions.:

We f'cast NAB will deliver EPS -10.2% seq to 127.7cps (including $200m one-off prov). Focus will be on the outlook given: (1) deteriorating UK economy, (2) Insto bad debts, (3) NIM pressure across all fronts. SGB f'cast EPS up 5.4% to 116.6cps.

Remain cautious with Neutral Sector stance. FY09E PE 11.0x.:

We remain Neutral on Banks post ANZ & WBC results given: (1) potentially lingering "bad boys", (2) credit growth slowing imminent, (3) revenue headwinds increasing (4) risk of consumer stress post 100bp rate hikes since August 07.