Surging bank shares get new lift from UBS analyst

Bank stocks built on two weeks of gains after a ‘more optimistic’ UBS analyst upgraded two of the majors.

Analysts are more optimistic about banks’ prospects.

Already surging Australian bank shares received a further boost as a leading analyst upgraded two of the majors.

Shares of the four major banks rose between 1 per cent and 2.3 per cent after UBS analyst Jonathan Mott upgraded National Australia Bank and Westpac to “buy” from “neutral”, while also increasing their price targets by 24 per cent to $20.50 and 11 per cent to $20.50 respectively.

It comes after banks posted an exceptionally strong rise in the past two weeks.

Mr Mott said he was “more optimistic on the banks in the near term”, amid positive news and a reopening of the economy as coronavirus restrictions ease.

After rising almost 13 per cent last week, the S&P/ASX 200 banks index was on Friday heading for a weekly rise of about 8 per cent, compared to 3.8 per cent for the broader S&P/ASX 200 index.

During the recent coronavirus-related bear market in shares, the banks index hit its lowest point since March 2009. It has now risen more than 31 per cent to hit its highest point since early March.

Mr Mott noted that Australian banks have come under sustained pressure over a number of years.

Factors weighing on the banks have included strengthening of capital, funding and liquidity; increased competition via new entrants and returning players, as well as mortgage brokers; sustained pressure on margins from falling interest rates; higher compliance and technology spending; pressure to meet community expectations after the Hayne royal commission; and now the fallout of the COVID-19 crisis and recession.

Mr Mott said decisions by ANZ, Westpac, Bank of Queensland and Macquarie Bank – under strong pressure from the Australian Prudential Regulation Authority - to not to pay a dividend, served as a reminder to investors that banks are “not annuity businesses”.

“However, with the economic outlook less bleak than anticipated even a few weeks ago, the likelihood of a further deterioration in asset quality and risk-weighted assets inflation driving additional highly dilutive capital raisings has reduced materially,” he said.

Moreover a lower reliance on JobKeeper wage subsidies than the government previously expected also “provides some flexibility for further targeted stimulus” as current packages, loan deferrals and rental relief expires in October.

The government also announced a $680m “HomeBuilder” housing stimulus package this week.

“We reiterate that we do not believe we are out of the woods from an economic or health perspective, especially if a vaccine rollout is delayed,” Mr Mott said.

“However, we believe the market is likely to factor in a recovery in bank returns unless we see further economic deterioration.”

JP Morgan analyst Andrew Triggs said last week that valuations in the Australian banking sector “remain cheap” and that an impressive rise in their share prices was “long overdue”, with banks having underperformed by 19 per cent from the peak of the Australian share market in February until the rebound in banks started this week.

“We see cause for optimism that more dire forecasts on economic activity may have overstated the risks, with restrictions easing across the country,” Mr Triggs said in a report dated May 28.

But in his view a price-to-book value of one could prove to be the ceiling in the short-term (excluding CBA), given the ongoing uncertainty and structural headwinds the sector faces.

Macquarie Equities analyst Victor German said ANZ, NAB and Westpac are now trading broadly in line with their fundamental valuations while CBA is trading about 20 per cent above its fair value.

“Australian banks remain expensive relative to global banks, and elevated discount to the broader market is consistent with the offshore experience,” Mr German said.

“Given uncertainty in the outlook, we believe a discount to fundamental valuation is presently warranted and reiterate our underweight sector view.”