The banks are nearing levels where they might be a buy accrding to a report by Credit Suisse. It raises an interesting question. CS is not particularly bullish on bank earnings, but believes the sell off has been overdone. That means that it is not rating the risk potential (of a severe housing correction) which, while it remains potential, is not something that can easily be rated.
We are now more positive on the banks sector, upgrading both ANZ and WBC to OUTPERFORM (both from Neutral). This positive reassessment is based on value (not earnings growth or earnings momentum, which we believe remains challenged). With current bank stock multiples (1.7x book, 9.6x PE, 7.2% yield) approaching financial crisis trough levels, we see value underpinned by key bank balance sheet metrics which are all considerably improved (capital, provisioning, and funding mix). Near term we see potential catalysts to crystallise value into bank share prices in:
1) some resolution of the European sovereign debt crisis; 2) the raising of the US debt ceiling; 3) QE3; and 4) a consensus emerging that the cash rate cycle in Australia has peaked (leading to a decline in bond yields, which is prima facie positive for bank sector valuations).
The key risks to our view include: 1) current sub-trend earnings growth environment and/or potentially negative sector earnings momentum, together with 2) our thesis of a potential 1+ notch S&P credit rating downgrade for each of the major banks albeit we see valuations offering downside protection to such risks.
The “solution” in the EU, is spilling over into the Australan market, Royal Bank of Scotland notes:
We have been encouraged by the degree of political willingness shown by core EMU leaders to support the liquidity of continental European bond markets. While there are many hurdles to cross (including parliamentary approval), equity markets are due a short-term re-rating, consistent with reduced systemic risk.
RBS says this will be good for Australian banks, which is fair enough given their dependence on offshore borrowing:
Last night’s show of political commitment from the leaders of core EMU countries deserves to go some way toward producing a recovery in risk assets (in particular, the Australian banks), as we believe it signals a willingness to ensure the liquidity of continental Europe and progresses toward an orderly restructuring of the periphery’s debt burden.
These are CS’s recommendations:
Our unchanged major bank order of preference: NAB (OUTPERFORM)ANZ (OUTPERFORM), WBC (OUTPERFORM) CBA (NEUTRAL). Similarly with the emphasis on value in our sector view, our major bank stock picks also exhibit a clear value bias.
Take your pick. For me, I think the earnings squeeze is a significant issue, and there is still that looming possibility of a severe housing correction. And there is little doubt that further ructions are to come in the global capital markets.