From Morgan Stanley:
We have a negative stance on Australian banks given the prospect of worse than expected capital requirements, an unbalanced housing market, a challenging operating environment, flat dividends and full trading multiples. NAB (EW) is our preferred major bank, while we have UW ratings on WBC and ANZ.
Key Issue #1: New Capital Requirements. APRA is due to comment on some of the recommendations from the Financial System Inquiry “shortly”.We think the market is underestimating the potential impact of the Basel Committee’s risk weightings review,as well as the probability of a higher DSIB buffer. Our forecasts assumethat the majors will need to raisea further ~A$30bn of capital via DRP, share placements and/or asset sales over the next 2-3 years to ensurethat CET1 ratios land near thetop quartile of “internationally active” banks.We also believe that banks will gradually lower their payout ratios, leading to a period of flat dividends.
Key Issue #2: Australian Housing Market. ”Prudential concerns” about “unbalanced” growth in the Australian housing market led APRA to announce a range of steps to reinforcesound residential mortgage lending practice in late 2014. In our view, this means Australian housing loan growth has peaked, and there is a chance of further regulatory measures in relation to investment property and interest-only loans.
Key Issue #3: Challenging Operating Environment. We believethe banks’ upgrade cycle has ended: the economic environment is uncertain, the outlook for loan growth is modest,competition is increasing within the oligopoly, there is structural pressure on fee revenues, material cost savings require up-front investment,and loan losses are at “bottom-of-the-cycle” levels.We forecast average EPS growth of ~2.5% in FY15E and FY16E.
Key Issue #4:Full Trading Multiples. Despite the ~10% share price correction in April / May, major bank trading multiples have expanded since the start of the year.Weview a one-year forward P/E multiple of ~13.1x for an averagetwo-year EPS CAGR of ~3% and a P/BV multiple of ~2.2x for an averagesustainable ROE of ~14% as full.
Totally agree. While delays in Fed hikes, Greek and Chinese worries will keep global bond rates down and offer a yield tailwind to the banks, the operating environment is deteriorating. The real question now is not whether to buy but whether it is time yet to short. For the bold and medium term focused yes, for those that like to see the white of the eyes first then another year or so ought to do it.
