Price May Be Right For A Punt On Banks
Sydney Morning Herald
Saturday October 18, 2008
The shares of the big four banks are cheap. Their share prices are down as much as 40 per cent from their all-time highs of late last year. Will bank shares pay off handsomely for contrarian investors who take the plunge now? Or will investors end up with a black eye having taken a sucker punch?
Non-bank lenders and regional banks are not as competitive in mortgage lending as their larger peers because they find it harder to access funds due to the global credit freeze. The Commonwealth Bank's purchase of BankWest and Westpac's of St George is only the beginning of consolidation in the sector. The four are highly rated by credit agencies, have strong balance sheets and remain hugely profitable.Peter Warnes, the head of equity research at Morningstar, says the big banks are "very close to the 'buy' zone, or in it, at these prices".The big four are trading on price-to-forward earnings multiplies of about 10 times, with CBA more than 13 times. On their expected earnings for the 2009 financial year they will pay shareholders cash yields of between 6 and 9 per cent at current share prices.Three will report their results within the next fortnight. The Commonwealth Bank released its results in August and, as the first to report, is an indicator of how the others are likely to be weathering the storm. The Commonwealth increased its cash profit by 5 per cent in the year to June 30, over the previous 12 months, well down on the double-digit earnings growth of recent years.Warnes is not expecting any nasty surprises when the others report. He still has a "niggling" doubt about whether NAB will have to make more provisions for credit impairment. However, this week NAB said it was bringing forward its full-year results in the "interests of providing certainty to the market" and that it did not "foreshadow any proposed material announcement". Nevertheless, Warnes says NAB's exposure to the British mortgage market through its ownership of the Clydesdale and Yorkshire banks makes it the riskiest of the big four.Other analysts and fund managers are not so sure. Lending commitments (for housing, personal, commercial and lease finance) for August were 30 per cent lower than a year ago, although that was before the Reserve Bank's 1 percentage point cut to the cash rate to 6 per cent and the likelihood of more cuts. "I do not see tremendous value in the banks at the moment ... because the Australian economy is going to slow," says James Falkiner, the founder of Falkiner Global Investors. He says the banks' competitive position is enhanced at the moment but when credit markets return to normal, non-bank lenders will be able to access cheaper funding. The Federal Government has also provided small banks and non-bank lenders with $8 billion of funding to help them provide competitive mortgages for home buyers.Greg Canavan, the head of Australasian research at Fat Prophets, says the "whole appetite for credit is diminishing and that is going to continue for some time". Although the level of credit impairment is still low, he is expecting it to increase over the next few years, constraining profitability.Falkiner says the banks have significant wealth management operations that will help them but that their "stock in trade" is raising cash from depositors and lending. This is going to be more difficult to grow their loan books as the economy slows over the next 12 months.
© 2008 Sydney Morning Herald
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