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By Gareth Vaughan
Analysts at RBS Morgans have BNZ's parent National Australia Bank (NAB) as their top stock pick among Australasia's big four banks, and predict the big four will provide annual returns of about 10% to shareholders.
In a research report, entitled Time for a breather, RBS Morgans argues the big four - NAB, ASB's parent Commonwealth Bank of Australia, ANZ and Westpac - are now marginally overvalued. Because of this they have a "neutral" stance on the sector. According to Macquarie, shares in the four outperformed the S&P ASX 200 Index by 9% in the year to January 18. Westpac shares rose 28.6%, CBA 25.3%, ANZ 22.5%, and NAB 10.3%. The index rose 12.5%.
RBS Morgan notes shares in the big four now trade at the equivalent of 2.3 times their net tangible assets.
"With valuations 'full' (but not overdone), and earnings upgrades unlikely in the short-term, full-year 2013 bank sector total returns should be limited to just earnings per share growth plus the (dividend) yield. This equates to about 10%," RBS Morgans says.
The firm's "pecking order" places NAB first with an "outperform'' rating, with Westpac second, ANZ third and CBA fourth, all with "neutral" ratings.
NAB, with its well documented problems at Britain's Clydesdale and Yorkshire banks (reportedly attracting interest from Spain's Santander, which was denied by Santander), trades at an 18% discount and has a balance sheet in line with peers on capital, provisioning and funding, RBS Morgans argues.
"That said sentiment towards the bank remains poor and we believe it needs a catalyst from UK bank results and its first quarter trading update to rerate."
Of Westpac the analysts say: "Trades at a 3% premium and is our second pick after posting the best 2012 result among the major banks. It also has the strongest capital position. The biggest potential weaknesses we see are the apparent slippage in its relative asset quality compared to 2007-08 and its low cost-to-income ratio leaving less room to boost earnings by cost cutting."
RBS Morgans says ANZ trades at a 10% discount but its institutional and international business interest margin is set to fall and its Asian business is now in a consolidation phase. Meanwhile, it says CBA trades at a 19% premium.
"It (CBA) is the weakest of major banks on capital. We believe its asset quality edge over peers will be a bigger strength if the domestic slowdown worsens."
Analysts at UBS last week downgraded their rating on CBA to "sell" from "neutral" citing its market value recently topping A$100 billion and "stretched" valuation metrics.
Back at RBS Morgans, several "fundamental" trends are seen pressurising bank earnings through the 2013-14 year. These include lower base interest rates, amortisation of deferred IT spending, and the risk of a hard landing in the Australian economy increasing bad debt expenses.
"Upside risks include the boost to net interest margins from lower wholesale spreads and capital management. In our view the negative risks outweigh these positives."
Meanwhile analysts at Citigroup, who have "buy" ratings on ANZ, CBA and Westpac, say they don't foresee a significant deterioration in operating conditions that would see big bank share prices underperform. They have a "neutral" rating on NAB. Whilst noting a "positive surprise" could come from management change, they say risks remain in the British property market where NAB is exposed, and there's also risk of restructuring charges at NAB stemming from a proposed cost reduction programme.
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