ANZ, CBA, NAB and Westpac share prices: 2021 Outlook
We look at Morgan Stanley’s 12-month price targets and ratings on Australia’s big four banks.
Bank stocks enjoy a bullish six months
ASX bank stocks have rallied firmly over the last six months, with Australia’s big four banks – ANZ, CBA, NAB and Westpac – all outperforming the ASX 200 benchmark in that period.
This comes as the economic outlook improves, Australian property prices rise and the Australian Prudential Regulation Authority (APRA) relaxes some of its capital management guidelines for authorised deposit taking institutions (ADIs) in Australia.
Property Prices Rebound
During the peak of the coronavirus in 2020, there were very real concerns that property prices were going to crash. While property prices did indeed dip, they have since recovered strongly, with Australian dwelling values making fresh record highs in January.
Month on month, national dwelling values rose 0.9%, taking Australia's median dwelling value to $583,157 by January 31, according to CoreLogic. Darwin, Hobart and Perth led those gains, rising 2.3%, 1.6% and 1.6%, respectively.
Commenting on these figures, CoreLogic's Tim Lawless said:
'Internal migration data shows more people are leaving Sydney and Melbourne for regional areas, resulting in a transition of activity from the metro regions to the outer fringe and regional markets. This demographic trend is further compounded by the demand shock of stalled overseas migration.’
‘As Melbourne and Sydney historically receive the vast majority of overseas migrants, these metro areas have been the hardest hit by this demand shock,’ Mr Lawless Added.
For reference, housing values have outperformed unit values in the last six months.
APRA’s Latest Directives in Focus
Beyond rising dwelling values, one other sticking points for bank stocks over the last year has been regulatory guidance around capital management expectations. As a means of shoring up Australia’s financial system, APRA cautioned ADI's need to limit unecessary capital distribution during the height of the pandemic, with APRA’s Chairman, Mr Wayne Byres, last April saying:
‘APRA expects ADIs and insurers to limit discretionary capital distributions in the months ahead, to ensure that they instead use buffers and maintain capacity to continue to lend and underwrite insurance,’
Mr Byres further added that this may necessitate the ‘prudent reductions in dividends, taking into account the uncertain outlook for the operating environment and the need to preserve capacity to prioritise these critical activities.’
One key specification of these guidelines, at the time, was that banks’ payout ratios should not exceed 50% of earnings. With such restrictive guidelines in play it should come as little surprise that bank stocks were sold-off at a rapid click during the early parts of 2020.
Indeed, APRA would eventually reverse that guidance, in mid-December updating their capital management guidance for ADIs. Here the regulator said it would no longer require banks to meet a ‘minimum level of earnings retention’.
This is not to say that the regulator had suddenly relaxed its expectations for banks to prudently manage their capital; after all, it was with noted that the expectation was for ADIs ‘to remain vigilant, regularly assess their financial resilience through stress testing, and undertake a rigorous approach to recovery planning.’
APRA also wrote that, ‘The onus remains on boards to moderate dividend payout ratios to ensure they are sustainable, taking into account the outlook for profitability, capital and the broader environment.’
Morgan Stanley Bank Outlook
With all this going on, analysts from Morgan Stanley (MS) have remained constructive on the sector, with WBC their most preferred big four bank and CBA their least preferred.
Westpac Banking Corporation is MS’s preferred bank stock among the big four, with the broker highlighting a number of positives, including:
- The expectation that loan losses have peaked
- The threat of additional capital raises is likely over
- There is an attractive medium-term valuation outlook for the bank
- 'Mortgage market share loss will moderate and the outlook for the housing market has improved.'
MS has an Overweight rating and $24.60 price target on WBC.
Despite MS analysts arguing that ‘ANZ has a lower-return business mix than peers, while its revenue and margins are likely to decline again in FY21E,’ the investment bank has an Overweight rating and $26.20 price target on ANZ.
Like WBC, Morgan Stanley analysts see a lot to like about ANZ at current price levels, including the bank’s:
- ‘Credible cost reduction[s]’,
- Robust credit risk profile and capital position
- Current valuation, with it being noted that ANZ trades on a ‘discounted’ multiple
The prospect of ‘improved retail franchise performance and upside to housing loan growth’ was also flagged as a key positive for ANZ.
Among high expectations, 'pressure on retail bank profitability' and 'less earnings leverage to recovery and less re-rating potential than other major banks', CBA stands out as Morgan Stanley's least preferred bank of the big four.
MS has an Underweight rating and $78.50 price target on CBA, implying some potential downside from current price levels.
Overall, the investment bank likes the clarity behind NAB’s strategy, its robust capital position and, as with the case of WBC, believes that loan losses have likely peaked. From an income front, MS analysts also believe that ‘there is potential for a strong dividend recovery.’
Despite that, there are some negatives: A weak revenue outlook, credit risk concerns and the ‘>A$12bn of equity issues over the past three years weigh on the ROE and dividend recovery,’ are among other reasons flagged by the investment bank.
As result of those reasons, MS has an Equalweight rating and $24.50 price target on NAB.
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