The four major lenders are trading on an average, one-year forward price earnings multiple, a core way of measuring valuation in the equity market, of 15.9 times. This is well above the 10-year average of 12.2 times before the COVID-19 pandemic and 14.4 times for the past three years according to analysis published by Morgan Stanley. Investors are betting on official rate cuts this year and benign bad debts, pushing the ASX 200 to record levels.
“We think [this] largely reflects the prospect of multiple rate cuts in 2024 and a more optimistic outlook for the Australian economy and banks’ earnings over the next two years,” said Morgan Stanley’s Richard Wiles.
For now, regional bank Bendigo and Adelaide Bank, which reports first-half numbers on February 19, has been swept up in the bank stock melt-up. Its shares are up 6.8 per cent over the past 6 months.
But Goldman Sachs has put Bendigo Bank on its list of the companies most likely to deliver negative surprises this earnings season. Citi analysts have also told clients that Bendigo is “setting up for disappointment”.
“Outside the big five, smaller banks paint an entirely different story with declining market share and often mortgage balance attrition,” Citi’s Mr Sproules said. “With little lending growth and continued [margin] decline, they are set to see their core profit underperforming the majors. Regional banks Bendigo, Bank of Queensland and AMP have been finding it very tough to find any growth.” (He added that Suncorp Bank is an exception, growing strongly ahead of a decision about its takeover by ANZ.)
Bank of Queensland said on Friday it had sold a portfolio of New Zealand corporate lending and finance leases worth $221 million at 91 per cent of its book value, to UDC Finance, resulting in a $17 million to $20 million loss to be recognised in the first half.
Meanwhile, Mr Sproules said Bendigo’s lending momentum in both mortgages and business has turned negative and the significant build-up in liquidity over the first quarter will be detrimental for lending margins.
At the big-end-of-town last week, share prices were volatile given ructions in the United States about possible delays to rate cutting and concerns about some regional banks’ exposure to commercial property.
Last Thursday, local banks fell sharply. But they rebounded on Friday, and over the month of January, the average major bank total shareholder return was 5.5 per cent, better than 1.2 per cent for the ASX 200.
Mr Wiles said investors during upcoming earnings reports, including first quarter trading updates from NAB and Westpac, will focus on the potential for RBA rate cuts and expectations of more rational competitive behaviour, as seen in December.
Inevitably, given the sharp rate rises, underlying loss rates and the size and timing of provision releases will also be in focus, along with the potential for new share buybacks, reflecting banks’ capital strength, and further increases in dividends, he added.