Banks run equal race
06 November 2013
One of the lessons in investment is that similar companies in a sector tend to converge. Australia's oligopolistic industry structures rarely allow outperformance for long, provided they are competently managed. There is usually a reverson to mean.
This point is made clear by Bell Potter's Charlie Aitken kn relation to National Australia Bank, which now has a price target of $43:
"It’s almost difficult to believe that just under 1 year ago National Australia Bank (NAB) shares were $23.00 after delivering a full year 2012 result that drove a complete investor, analyst and financial commentator capitulation on the stock.
"At that stage it felt like only the most stubborn analysts and deepest medium-term value investors were left supporting NAB, but in hindsight it was a textbook capitulation at the bottom of the EPS/DPS and sentiment cycle.
"It was very, very lonely this time 12 months ago supporting NAB, they were considered a genuine pariah with unfixable UK issues. Consensus forecasts for FY13 were slashed and this time 12 months ago consensus was NAB would deliver EPS of 245c and DPS of 182. Yesterday the delivered EPS of 253c and DPS of 190c.
"12 months ago the small UK tail was wagging the entire NAB share price dog. Today, the Australian banking dog is wagging the small UK tail and NAB’s shares have dramatically closed the P/E discount to their domestic oligopoly peers. The chart below shows NAB had gone from laggard to leader, beating ANZ, CBA and WBC on a common share price performance base from this time last year. Did anyone think that was possible on this day 12 months ago?"
Aitken is not averse to self agrandisement and is a little less vociferous about his errors. He argues that the marjket is efficient at pricing the present, but not the future, which is debatable. To him, NAB is the best buy since Telstra was at $2.80.
"To me at the equity strategy level it’s all about getting the forward dividend forecasts right and then estimating what the all-powerful SMSF Army will pay for those dividend streams in an extended period of ultra-low domestic cash rates."
Elsewhere, Credit Suisse has a neutral recommendation on ANZ, making this comment:
"Good result with strong DPS, strong lending growth, good improvements to asset quality and capital metrics, numerous guidance benchmarks being issued (including a sharper ROE focus overall), and with margins no worse than expected. What we liked about the result: Strong lending growth (broadly based); Lower impaireds; Stronger capital ratios; Institutional margins not as bad as guidance. What we didn’t like: Soft non- interest income; Strong cost growth (which also exceeded revenue growth). Industry read-throughs: Positively, deposit spread pressures in Australia and NZ are easing and institutional provision charges / flows of new impaireds continue to decline; less positively, financial markets income is under pressure."
Here are Credit Suisse's fundamentals:
Deutsche Bank has a buy on NAB, giving the stock a forward dividend yield of 5.9%:
"Whilst the 2H13 result was messy and delivered very little underlying growth, we believe the outlook for FY14 is much brighter with above peer EPS growth to be delivered by: i) lower bad debts, ii) lower cost growth as restructuring benefits emerge; and iii) strong balance sheet momentum. With NAB trading ata 12% PER (earnings multiple) discount to the peers and improving momentum we believe the stock looks cheap at current levels and have maintained the BUY rating."
Morgan Stanley has an equal weight recommendation on Westpac, describing the stock as a "stayer". It has te stock on a foward dividend yield of 5.3%:
"WBC is managing revenue and expense growth to achieve “core earnings growth”, rather than “positive jaws”. Management is achieving its objectives, but expenses have been higher than our forecast for the past two years and incremental expense savings have edged lower over the same period. We think it will be difficult for WBC to beat consensus expectations on costs, without reducing investment."
Here are Morgan's Westpac fundamentals: