ADB

Here are the Macquarie Research Equities (MRE) highlights for some of the recent impacts experienced by the Australian Banking Sector.

Banking Sector – Westpac Banking (WBC) Looks to Slay the Dragon

Adelaide Bank (ADB) has seen their shares gain 8% over the past 24 hours, observed by analyst Macquarie Research Equities, following speculation that the Bank of Queensland (BOQ) bid for Bendigo Bank (BEN) could lead to further consolidation in the bank sector. With the renewed focus on the next round of consolidation activity in the banking sector, ADB's wholesale business model and currently un-stretched valuation (lack of any takeover premium being price in) make it stand out as a potential breakup target. Ultimately ADB as a whole is unlikely to be attractive to one single party given its range of businesses and wholesaling model, however it could lend itself to being broken up. Interested players could include MBL, GE, CGF, the major banks would be particularly interested in ADB's margin lending book.
The anlayst values Adelaide Bank (ADB) on a stand alone basis of about $13.50-14.00. Assuming 15% cost synergies, one could envisage a takeover valuation of up to $15.65. The 15% assumption is below typical bank merger cost synergy targets but reflects ADB diverse range of businesses and the fact the analyst expects any corporate activity may involve multiple players. Further, the analyst have not been aggressive on takeover synergies given it may be more difficult to extract full value for some of ADB's newer growth businesses (portfolio funding and Adelaide Managed Funds). The most attractive part of ADB's business is margin lending, where ADB is one of the larger players in the market and a significant premium can be justified. ADB's recent 1H07 result did increase confidence that ADB's earnings stumble may be confined to FY07 and the company could return to a 10% EPS growth profile in FY08. This supports a stand alone valuation of $13.50-$14.00 suggesting no premium for the possibility the stock is broken up is factored in at current levels. Given this and the market's focus on potential further consolidation in the sector following BOQ's bid for BEN, ADB could rally further in the short term.

Last week, global markets stumbled following reports that China was looking to impose controls to curb its rapidly growing economy and concerns that a soft landing for the US economy may be more difficult than first thought. In the background, the Australian reporting season continued its final week, here are analyst Macquarie Research Equities (MRE) observations and thoughts. The HY December 2006 aggregate earnings reported for the market printed 1.5 percentage points below analyst expectations versus those held at the start of this reporting season.

Merrill Lynch has upgraded their recommendation rating for the Adelaide Bank (ADB) stock from Neutral, Medium risk to Buy. The broker has upgraded as a result of a general belief in system credit growth in the industry, and various other factors including Adelaide Bank's discount to valuation of 17% and upside risk to consensus earnings estimates.

Adelaide Bank (ADB) shares continued to trend higher yesterday following the release of an Update Statement, reiterating the banks medium term guidance of double-digit earnings per share (EPS) growth. Macquarie Research Equities (MRE) consider ADB to be the best of the regional banks, offering the highest growth EPS outlook of the regional banks, with the lowest PE (14.4x). MRE currently hold an Outperform recommendation on ADB.

Key points delivered through the Update Statement were as follows: