From Brian Johnson at CLSA:
In BJ’s latest banking tome he justifiably makes the claim that the outlook for the Aussie banks remains challenging. Prior to the share price peaks of April ’15 the banks benefited from robust system credit growth, pricing power on mortgage lending, subcycle loan losses given writeback gains and model-generated declining regulatory capital releases. EPS growth was strong and DPS growth even stronger as dividend payout ratios expanded. BJ is now of the view that system credit growth is slowing, reduced mortgage pricing power sees NIMs vulnerable to rising deposit rates, loan loss charges will rise as writeback gains diminish and regulatory capital intensity is rising. EPS growth will slow and DPS cuts are likely. While the timing of any potential capital raisings has been pushed out by APRA’s latest announcement BJ continues to think the banks are short ~$27b of CET1 capital. As a reminder BJ’s price targets are set on an excess ROE above 10% cost of capital/price to book methodology with is current targets premised on mid-cycle earnings conditions as opposed to further diluted recapitalised mid-cycle conditions. In summary, and by rank his calls are:
High-Conviction BUY
MQG– PT $95.60more than a “vanilla” investment bank, a discounted high-growth infrastructure fund manager.
Outperform
CYB PT $5.75 – strong growth, cost out opportunity, positive regulatory environment and potential accretive acquisition.
NAB PT $25.41 – Shrunk to greatness as exited shareholder-value destructive businesses. Backwards looking price still discounts history albeit forward risk profile improved and has excess opportunity latency.
Underperform
ANZ PT $23.16 – New CEO Shayne Elliott’s restructuring initiatives should be applauded. Discounted price prima facie attractive but still carries above-peer risks. FY16 EPS and DPS are closest to midcycle but its risk profile is markedly higher than peers.
BOQ PT $11.00 – Earnings headwinds but the dividend looks sustainable which should provide some valuation support.
BEN PT $11.10 – Homesafe, Keystart, falling rates vs capital upside.
SELL
WBC PT $24.54 – well-managed, but peer relative expensive and flat A94¢ 2016 final dividend sees payout ratio too high at 80%.
CBA PT $57.58 – overearning, overbought, undercapitalised, overly expensive. Trading premium unwarranted
The recent push upwards in prices has been led by offshore moves in financials as the yield curve steepens. But, fundamentally, the headwinds remain.
