Australian Banking Sector Update

Submitted by Jim Thesiger on 12 May, 2008 - 14:45

Australian Banking Sector Update from sharemarket analyst Macquarie Research Equities.

Australian Banking Sector Update

Time to buy back the shorts

We are increasing our price targets on the banks by an average 5%:

Following a better than expected reporting season and clarity around environment and event risk, we are moving to increase our price targets across the bank sector. On average, our PT's have been increased by 5%.

Banks have been large under-performers YTD:

Banks are off c.20% YTD and 30% off their peak in November last year. They have underperformed the market by c.15% over that period. Largest underperformers YTD have been CBA (-24%), NAB (-18%) and SGB (-27%). WBC has been the standout performer (-8%).

Banks have comforted the market on systemic issues and event risk:

Reporting season has seen little evidence of systemic deterioration in bank loan books. Whilst BDD charges have increased from historically low levels, this has mainly been due to "pre emptive" provisioning increases and some specific charges. Event risk also appears to be diminishing with the confirmation of Centro's seven month extension (granted yesterday) and the impending confirmation of Allco's extension. No new "bad boy" single name exposures have emerged in recent times.

Revising Sector Call. CBA no longer least preferred:

Our PT increases leave the banks with more of a Neutral stance relative to before. Our order of preference is now ANZ, SGB, CBA, WBC and NAB. Our upgrade in preference to CBA follows hefty underperformance, moving it ahead of WBC post large outperformance. NAB looks cheap, but UK system and M&A risks leave us cautious.