There is a growing degree of scepticism about the banking sector amongst analysts and it is not surprising. As UBS points out Australian banks’ market capitalisation has now reached US$305bn, for which you could get: US Bancorp; Goldman Sachs; Standard Chartered; Deutsche Bank; and the entire UK domestic banking system. The scepticism can be seen in the neutral rating by Macquarie on Bendigo Bank despite arguing that it has the “best balance sheet in the sector”.
“Capital continues to grow, with core tier 1 capital at 8.09% helped by post balance date capital actions such as the IOOF sale and sale of securitisation B Notes. BEN has also improved its level of deposit funding, which now sits at 80% vs 75% a year ago. Given this, BEN continues to look “best of breed” on balance sheet quality.”
Bendigo is on a forward dividend yield above 7% and an earnings multiple below 10, so that is a fair dose of scepticism about the sector. UBS is sounding a similar note:
“We view the Aussie banks as a strong, well capitalised sector delivering mid-teen ROE in a low growth environment. However, given the global chase for yield we believe it has rallied too far, too fast. Since September the Banking Sector has rallied 35% while EPS forecasts are almost unchanged and the sector has delivered ~1.5% EPS growth … Post this rally we are left with an Underweight sector stance and no remaining Buy ratings.”
UBS is arguing that the banks’ capital position is strengthening, which of course should remain the case while the housing sector goes sideways:
“Capital was the talking point of the results with all the banks stating they are now “happy” with their capital levels. On a Basel III Core Tier 1 (Harmonised) basis: ANZ 9.8%, CBA 9.8% (~10.1% pro forma for BankWest advanced accreditation), NAB ~9.3% and WBC ~10.3%. We believe that ANZ’s CT1 will drift higher to be more consistent with Asian peers, while NAB is likely to continue to accumulate capital. However, we expect CBA & WBC to continue raising payout ratios and start neutralising the DRP as capital management tools.”
It is something of a measure of how skewed the Australian market is that Australian banks are worth the entire UK banking system. It is also a measure of how potentially vulnerable bank share prices are to either housing price weakness or weakness in the overall economy. The scepticism would seem to have some justification.