Banks: Banking on further share price upside

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
22 April 2021, 3:30 PM
Sectors Covered:
Banks

  • We again expect the upcoming round of major bank reporting to surprise on the upside and we expect a further increase in investor confidence in the outlook for asset quality, dividends and capital management.
  • We believe balance sheet strength and the commensurate robust dividend outlook, as well as capital management potential – as opposed to revenue growth – are the key reasons to be invested in the major banks today. However, we do point out that we are more optimistic than consensus on net interest margins. The revenue growth outlook for the banks is also being supported by improving system home loan growth, COVID-19-related fee waivers coming to an end, and contraction of credit spreads creating tailwinds for markets and treasury income.
  • Over the medium term, we believe the cost-out story for the sector remains intact.
  • In this note we upgrade National Australia Bank (ASX:NAB) from Hold to Add.
  • Our key pick in the sector is now Australia and New Zealand Banking Group (ASX:ANZ), previously Westpac Banking Corporation (ASX:WBC). While we view Commonwealth Bank of Australia (ASX:CBA) as a relatively high-quality bank, we continue to view the stock as expensive and expect further underperformance relative to peers over coming months.

Watch

Consensus again looking too pessimistic on bad debts

Heading into the May round of reporting, we again appear to have the most optimistic credit impairment charge forecasts on the street for each major bank.

This is despite our view that our forecasts are conservative as we are assuming that collective provision (CP) coverages of credit risk weighted assets (CRWA) will not fall below ~140bps compared with CP coverages generally being <100bps pre-pandemic.

We consequently see upside risk to our earnings forecasts. We believe the asset quality outlook has improved further since the banks last provided updates for the Dec-20 quarter as a result of the following developments:

  • Federal Government’s targeted stimulus package for the tourism industry
  • Federal Government’s revised Coronavirus SME Guarantee Scheme
  • Repricing down of non-bank home loan warehouse facilities
  • Further improvement in the unemployment rate
  • Further strengthening of house prices
  • Strengthening of consumer sentiment and business confidence.

From this perspective, we believe consensus credit impairment charge forecasts look too pessimistic.

Consensus also looking too pessimistic on NIMs

We are also more optimistic than consensus on the net interest margin (NIM) outlook for each major bank.

While we acknowledge that a low interest rate environment and intense mortgage competition remain significant NIM headwinds, we expect these to be largely offset by the following tailwinds over coming months:

  • Continued strong growth in low-cost deposits
  • Access to the RBA’s Term Funding Facility
  • Repricing down of term deposits
  • Basis risk compression

ANZ is now our preferred major bank

Following outperformance from WBC this calendar year, it is now our second preferred exposure to ANZ on a valuation basis.

Fundamentally, we remain positive on the outlook for WBC, and we believe assertions that WBC’s home loan underperformance in 2020 was the result of poor IT infrastructure have already proven to be misplaced.

While we view CBA as a relatively high-quality bank, we continue to view the stock as expensive and expect further underperformance relative to peers over coming months.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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