MARKETS SPECTATOR: Are bank stocks too dear?

Morgan Stanley’s Richard Wiles says bank stocks are "fully valued".

The largest Australian banks –  ANZ Bank, Commonwealth Bank, National Australia Bank and Westpac – have everything, Morgan Stanley analyst Richard Wiles says.

Their earnings risk is modest, he says. “Their dividends are safe and their yields look attractive,” Wiles adds. But the stocks are too expensive, or in Wiles’ words, “fully valued”.

Wiles has downgraded his recommendations on National Australia Bank and ANZ Bank to “underweight”. “NAB has a higher credit risk profile, weaker provisioning and less scope for dividend growth than its peers,” he says. “ANZ’s institutional bank profits are under pressure, its retail and business bank pricing is aggressive, the Asian expansion weighs on group return on equity, consensus loan loss forecasts may prove optimistic and the stock is fully valued”.

At 1518 AEST NAB shares were up 1.07 per cent $29.31, against a 0.59 per cent fall in the S&P/ASX 200 Index. NAB’s shares have gained 34 per cent in 12 months. Meanwhile, ANZ’s stock had gained 1.14 per cent, to $27.86 and is also up 34 per cent in the last year.  

Still, the analyst has upgraded Commonwealth Bank to “overweight”.

“Commonwealth Bank offers relatively low earnings volatility, high returns and a favourable business mix,” Wiles says. “It also has the lowest credit risk profile and the best earnings and dividend growth outlook of the major banks”.

At 1518 AEST Commonwealth Bank shares had added 0.25 per cent, to $67.03. The stock is up 38 per cent in the last 12 months. Meanwhile, Westpac had gained 2 per cent to $29.01, and has added 45 per cent in the last 12 months.

Westpac is rated “equal weight” by the analyst. “We think that better franchise performance is factored in, momentum is slowing in key divisions and the stock is fully valued,” Wiles says. 

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