Australian Banking Sector reporting season preview from Australian market analyst UBS.

Start scooping up banks. Mild overweight.

Recent price falls provide a buying opportunity:

The Aussie banks have seen a sharp pull back in recent weeks following their global peers. We believe that this has been driven by: (1) concerns for the health of the US investment banks into their reporting season; and (2) overhang from the current global bank rights issues. As a result the Australian banks have now underperformed the All Resources by 46% over the last year.

Reporting season surprised on the upside:

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.

Bank PE's now 10.5x FY09E. Move to mild overweight.:

The banks have fallen back to 10.5x PE (1.6 stand dev below its LT ave of 12.3x). Price to Book is 2x (ROE 18.6%), div yield 6.8% (ff). We see this as an attractive point to accumulate banks. We believe that the risk/return outlook for the banks is now much improved relative to when the sector hit its lows in mid March.

Upgrade CBA to Buy ($50 PT). Pref: ANZ, CBA, SGB, WBC, NAB:

We have upgraded CBA to Buy following significant underperformance (down 26% YTD, underperforming the sector by 7%). CBA is on 11.2x (LT ave 13x). We see it as oversold. ANZ remains our preferred bank based on value at 9.7x.