CIMB has moved to reduce its recommendation on the banking sector to underweight as it lowered its net interest margin forecasts for fiscal years 2013-15 after reviewing product spreads across lending and funding. The review suggests that risks are skewed to the downside.
It has moved National Australia Bank to neutral from outperform – keeping it as its top sector pick. ANZ Bank and Westpac remain its second and third preferences while Commonwealth Bank is an underperform and is CIMB's least preferred exposure. CIMB sees the most likely sources of further downside risk as institutional loan margins and a lower-for-longer cash rate.
“For fiscal year 2013, we see more pressure emerging on spreads in the term deposit and transaction and savings account segments," it said in a note to clients. "Cost pressure should start to ease on banks’ wholesale term debt portfolios in fiscal year 2014 following a significant fall in spreads on new issuance since mid-2012. On the lending side, the boost from mortgage repricing should fade by the second half of 2013 and institutional lending spreads could fall further as repricing occurs."
CIMB’s move to downgrade the banking sector to underweight comes despite the banks’ dividend yield to government bond yield metric remaining supportive. However, more fundamental measures are now looking stretched with the banks’ price-net tangible assets at 2.6 times, well above the broker's fair value estimate of 2.1. The price-earnings ratio is also 95 per cent of the market average versus the 15-year average of 85 per cent.