The performance of bank stocks will be increasingly dependent on being well managed businesses rather than exploiters of asset bubbles. Even if there isn’t a major correction in the property market — no sure thing — the era of rapid house price growth is over. Australian banks still dominate the market, a nice little government backed oligopoly, but they will have to become more internally efficient. Goldman points this out in a report, saying, obviously enough, that yield is the focus, and the main risk is a bad debt shock:
Low credit growth outlook
Mortgage growth is at its lowest level since the mid-1970s (the start of RBA’s data series). This presents a challenge given banks are primarily mortgage-oriented, business lending is shifting towards credit markets and funding constraints. But ROEs/ROAs can be sustained and capital generation improves Domestic examples are limited but offshore examples show banks may still maintain/improve ROE/ROA in low growth periods. Capital generation should also improve as lending growth slows. However, ROEs/ROAs are likely to be choppy given bad debt and funding volatility. Excess capital deployment will be the key to long-term TSR performance TSRs of 10%-15% pa are achievable if banks maintain ROEs/ROAs. Banks that can execute on growth options offshore are best placed for TSR outperformance. High dividends are attractive given franking benefits; however, some banks may be incentivized to buyback shares instead.
CBA’s technology initiatives may push it futrher along the path towards the needed operational efficiency. RBS likes it, although it only has a hold on the stock and a price taregt of $55.16:
CBA’s technology investment has delivered it a 2-3 year lead over peers in offering real-time payments to Australian bank customers. In our view, this will be a positive differentiator for CBA and could drive market share gains in a slowing retail banking market. With CBA’s trading premium to peers more than justified by its higher sustainable ROTE, we maintain our Hold recommendation and for us it remains #2 among the big 4.
Merrill Lynch doesn’t think much of it in terms of the stock price and has an underperform rating and a price objective of $48.20:
While we can see points of differentiation and potential revenue upside from technology investment – especially on the business banking side – the retail banking side may take investors longer to be convinced. According to APRA data yoy to Mar-12, housing share is down 0.6% and household deposits down 1.2% despite the obvious IT gains. System level customer inertia, and target customer value, are key considerations in how much revenue upside to factor in from CBA’s current competitive advantage in IT. On this score we remain conservative.
The implication is that operational imrpovements will only take the edges off the deflating of the bubble, one suspects.