Morningstar has a conventional note on a conventional subject today: the rating of our banks. The broker looks at ANZ, concluding that it is undervalued. It has done some scenario analysis and found that ANZ is more than $6 below Morningstar’s bear case of $26. It says the bear case is not the worst case, which is what it believes the market is factoring in. But is says that if anything but the worst case does not occur — i.e. a collapse of Europe and international credit markets — then the stock is undervalued.
Commercial loans are growing at 5% and residential loans are growing at “de-leveraging era system growth” of 7%. Net interest margins are widening as competition eases. Banking fee income is rising as ANZ chases income in Asia. All fine on the face of it. But of course Morningstar is assuming “stable funding costs”. Hmmm. I don’t know if many bloggers on MB would agree with that.
The bearishness comes from the international context, which, as Macquarie notes, that is turning pretty nasty. Time for lower expectations:
The Reserve Bank of Australia (RBA) has intimated that over the longer term. In our view this refers to a lowering of expectations around both asset growth and margins. If recent wholesale funding conditions are anything to go by, it is clear to us that higher wholesale funding costs are here to stay. While the majors may be able to pass on higher costs in the near term, this will not always be the case and there are implications of higher costs on asset growth and hence earnings growth. We think the time is nearing where the majors will need to consider where they wish to grow and/or shrink assets, particularly given potential deposit headwinds in the near to medium term.
Yep, de-leveraging is with us for some time. Asset bubbles get pricked. Rises in funding costs will get harder to pass on. It is that uncertainty that is hammering the share prices of the banks. Not to mention the possibility of serious fissures in the global financial system.