Bell Potter Top Picks From The Banks

Our major banks may not be outnumbered nor outgunned in the operational sense but some are clearly not seen to be occupying the moral high ground at the moment.

The Banking Inquiry also suggests complacency is an issue that has intensified in the last 3-4 years, perhaps through misplaced confidence arising from the fact that these banks were relatively unscathed relative to global peers during the GFC.

In any case, complacency appears to be partly cyclical in nature as there seems to be a financial crisis every 10 years or so (e.g. 1987, 1997, 2007 and 2017). Each crisis appears to coincide with the apex of each episode of complacency, with the major banks conversely suffering transient corporate amnesia in the years leading to a crisis.

Egos have been deflated and reputations have been tarnished, and those involved have accepted their shortcomings and are prepared to remediate and get on with the business of responsible banking. The Royal Commission may be the best wake-up call yet to the major banks and 2018 should then be the sector’s low point with most of the bad news now out of the way

March 2018 reporting wrap: Banks are resilient

Managing for profitable growth was the key theme in the reporting period ended 31 March 2018. The results were boosted by strong performances in the retail and business banks and were generally positive in terms of solid top line growth (~2% for majors and ~5% for regionals from better NIM and volume outcomes despite challenging conditions), ongoing cost discipline, good credit quality and overall balance sheet strength. ROE outcomes were as expected with the majors in the 11.4-14.7% range and the regionals including the smaller ones in the 7.7-11.0% range.

Irrespective of recent negative publicity, we believe it is not quite hell in a very small place as the sector remains in good fighting form – and this is partly due to APRA’s strong prudential supervision and foresight. Top line prospects may be more subdued in the medium term (more onerous credit approvals, volumes moving into line with GDP growth on top of NIM and other income headwinds) but the major and regional banks are expected to respond by maintaining cost discipline to ensure positive “Jaws”. Credit conditions should remain benign and dividend paying intentions are expected to be unchanged given improving capital and leverage buffers in place.

Top picks: Macquarie and ANZ

Our forecasts are largely unchanged while price targets are lowered for CBA (was $77.00, now $75.00) and NAB (was $31.00, now $29.00) given distraction and other risks ahead (both discount rates now 11.0%) and also after increasing NAB’s required dividend valuation yield to 7.0%. All ratings are unchanged.

Our top picks are MQG (execution/risk management, global asset management/infrastructure leverage, costouts, higher annuity-style ROE and strong capital generation); and ANZ (corporate/business focus, execution/risk management, cost-outs, surplus capital and lowest perceived downside risk to reduced broker originated mortgage volumes).

You can access Bell Potter's Top Picks From The Banks by TS Lim by clicking here.