MARKETS SPECTATOR: Shot across the bow for banks

Following National Australia Bank's somewhat surprising $250 million decision to top up its collective provisions for bad and doubtful debts, two major brokers have downgraded a couple of the big four banks.

Macquarie Group said that NAB's increase to provisioning, partially driven by uncertainty in mining and related sectors shows that its BDD uptick thesis is ahead of its forecast FY13 arrival. Hence, Macquarie has ratcheted up its first half 2013 estimates for BDD and downgraded Westpac to underperform from neutral.

It also noted that NAB and Westpac had seen the fastest growth and biggest gearing change in the mining and energy states of Western Australia and Queensland. The broker sees this as at least a partial contributor to NAB's caution around the slowdown that is filtering through these states.

Goldman Sachs has also been vocal, downgrading both Westpac and NAB. It sees insufficient upside versus its coverage, believing that despite Westpac's strong balance sheet, its valuation looks expensive. Hence, it has downgraded its rating to sell from neutral. Instead, Goldman Sachs continues to prefer ANZ due to its superior growth versus its peers

Similarly, NAB's return profile is looking less compelling versus other stocks in its financials coverage following asset quality concerns. It has downgraded NAB to neutral from buy.

Despite the downgrades, it doesn't necessarily mean these stocks won't continue to trend higher. It's well known that bank shares have been rallying due to their compelling dividend yields. With the yield on cash basically non-existent overseas and falling domestically, money is likely to continue to seek out high yielding plays.



Source - Iress