Bank getaway

Earnings for Australia’s four biggest banks in 2013 may show little improvement and that sentiment is already being reflected in the market.

Bank share prices are softening.

At 1247 AEST, ANZ (ANZ) shares, up 12% since June 12, have slid to $29.63 from $29.92 on August 2. It is a similar story with other banks. Commonwealth Bank (CBA), up 13% since June 7, is at $73.24, down from its opening price of $74.50 on July 31.

Shares in National Australia Bank (NAB), which have gained 10% since June 12, are at $30.95 compared with a July 31 opening price of $31.34. Westpac (WBC), which has increased 13% since June 12, is at $31.055 compared with $31.46 on August 2.

Such a slide in bank stocks is not surprising given the renewed focus on their earnings as the corporate results season, like the federal election campaign, finally gets underway. In the words of Credit Suisse’s James Ellis “bank earnings have been optimised”.

Net interest margins at the big four Australian banks are under pressure as a result of a lower cash rate. Loan growth is tepid. The cost-to-income ratio may not improve in the near term. For some of the banks, notably Commonwealth Bank and Westpac, bad debt charges can’t get any lower. Payout ratios probably will not be boosted as they currently stand at about 80%.

Data compiled by 1300 Home Loan shows competition between the banks on mortgages is heating up. Discounting on mortgage rates for new customers across the big four is increasingly aggressive while some banks have been forced to reprice their existing mortgages in order to keep old customers happy. In an election year it would not do if banks did not pass on the full extent of the Reserve Bank’s cut to its cash rate. That will further impact on bank margins.

Ellis thinks ANZ and NAB shares will perform in line with the benchmark S&P/ASX 200 Index. Commonwealth Bank and Westpac, he says, will underperform the index. Ellis’ 12-month target price for Commonwealth Bank is $71 and $31 for Westpac. He expects ANZ shares to be $31.50 and NAB’s stock to be at $34 in a year.

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