NAB expensive but banks well placed
Broker reports editor |
13 May 2014
The big banks are a favourite for DIY super investors, but picking the right time is always important. Deutsche Bank has downgraded its recommendation for National Australia Bank to a hold, arguing that the share price is too high given the company's poorer growth prospects:
"We have downgraded NAB to a HOLD following the 1H14 result with underlying earnings growth poor and the prospect of improvement in the near term difficult to see. Based on our forecasts NAB's 3 year (growth) in underlying earnings is only 3% vs the peer average at 6%. Whilst the recent share price underperformance appears to have baked some of this poor growth into the valuation, with the PER discount to peers in FY15 largely in-line with the average over the past 5 years, we do not think the valuation discount is big enough at present to compensate for the lower return outlook."
Deustche has a buy recommendation on ANZ, a forward earnings multiple of 13 times, a forward dividend yield of 5.3% and a price target of $33.80. It has a hold recommendation on Commonwealth Bank, a forward earnings multiple of 15.4 times, a forward dividend yield of 5% and a price target of $79.09. NAB has a price target of $34.14 and a forward earnings multiple of 12.8 times, and a forward dividend yield of 6%. Westpac gets a hold recommendation, a price target of $34.90, a forward earnings multiple of 14.5 times and a forward dividend yield of 5.5%.
Unsurprisingly, the differences between the banking majors, who have a dominant oligopoly, is not great. The AFR looks at where the profit growth for the sector will come from:
"To drive future profit growth (and hence allow big dividends and stock price rises to continue), banks must find ways to grow revenue, slice expenses and/or reduce provisions. So what do the recent results tell us about their ability to pull this off?
The blockbuster headline profit numbers for the big four in recent times – $27 billion in 2013 and $14.7 billion for this year’s first half – illustrate the extent to which the banks are highly adept at performing through a benign economic environment. PwC Australia’s financial services leader, Hugh Harley, says since the global financial crisis, the banks have developed a sophisticated appreciation of the many levers that can be pulled to drive profits higher.
“They have a skilled understanding in any given year where to get growth from, and they adjust accordingly.”
One example is provisioning for doubtful debts: this half, and over the past full year, about 60 per cent of the improvement in the banks’ cash earnings has been driven by reductions in bad debts, PwC found.
Last week, National Australia Bank’s lower than expected provisions for bad debts in Britain helped lift its group cash profit into the consensus range. Westpac and ANZ also reported lower provisions and fewer impaired assets; at Westpac, the bad debt-charge is at its lowest level since the second half of 2000 while at ANZ gross impaired assets are at their lowest since the end of 2008."
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