Australian Banking Sector Update

Here is an update on the Australian banking sector provided by Australian market analyst UBS.

Results and M&A - an eventful month

Reporting season surprised on the upside:

The last month has been one of the more eventful in recent years. While the banks saw substantial EPS downgrades leading into reporting season (FY08 Sector EPS downgraded 11.3% from Jan-April) the actual results surprised on the upside. Given (1) All five banks confirmed they are not seeing a systemic deterioration in credit quality. (2) No new single name "bad boy" exposures have appeared (3) Substantial term funding issues were undertaken (4) Banks are passing through funding costs and re-pricing for risk (5) Stronger markets income was delivered.

WBC and SGB merger spread blows out to 11.5%:

SGB's spread to the WBC merger terms has widened to 11.5% (ex dividends). We see this as large given the "No shop, No talk" clause means SGB can not solicit bids and can only open its data room once a formal bid is received. Also, recent pull back in share prices make counter-bids more difficult.

ANZ our preferred play. Comfortable on SGB and CBA:

Prefer ANZ given (1) Value at a 7% sector discount (2) rebased BDD charges and best provision cover (3) LT growth from Asia with mgmt experience. Risks: BDD. SGB likely to keep is premium although spread has widened. Given underperformance CBA is cheaper with capital strength and LT turnaround appeal.

WBC looks more interesting post pull-back. NAB looks expensive:

WBC has pulled back slightly post SGB bid (1% sector prem). NAB looks more expensive at sector ave PE given UK, US, higher NPLs and M&A risk.