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NAB and Westpac share prices rise, UBS upgrades both banks to ‘Buy’

As the big four see their share prices rebound, we examine why UBS has upgraded their ratings on NAB and Westpac.

NAB, WBC Source: Bloomberg

Westpac and NAB share prices in focus

Over the last few years Australia’s big four banks have been forced to contend with a myriad of seemingly ever-developing issues. While some of these problems were created by the banks themselves, such as the Royal Commission; others were decisively less self-inflicted, including: precipitously declining interest rates and a pandemic which has seen the banks brace for billions of dollars’ worth of potential loan losses.

Indeed, in March, amid the height of the coronavirus-led market sell-down, the banks saw their share prices fall dramatically: provisions were up and dividends, cut or culled completely, saw yield hungry investors abandon the financial stalwarts at a rapid click.

To give some idea of the severity of that sell-down, on 16 March, we reported that:

‘In the first thirty minutes of the session, ANZ’s share price plummeted 8.24% to $17.25 per share, CBA dropped 6.72%, NAB fell a staggering 7.01% and Westpac dove 7.01% to $16.85 per share.’

Though that snapshot doesn’t illustrate the lows the banks reached it March, it does illustrate the severity of the panic investors were feeling during the height of the coronavirus market meltdown. Even so, in the last month Westpac has risen ~15%; while NAB has trailed that impressive performance by a shade, rising a little over 14% in that period.

The UBS view: will dividends return?

Besides improved share price performance, a number of investment banks have also reoriented their views on the banks, with UBS today upgrading their ratings on both Westpac Banking Corporation (WBC) and the National Australia Bank (NAB) to ‘Buy’ as well as upgrading the price targets on both banks: Westpac (PT: $20.50 from $18.50) and NAB (PT: $20.50 from $16.50).

Looking at why the investment bank made these changes, UBS analysts said:

‘With the economic outlook less bleak than anticipated even a few weeks ago, the likelihood of a further deterioration in asset quality and RWA inflation driving additional highly dilutive capital raisings has reduced materially.’

Moreover, while the investment bank noted that we are not out of the woods yet, in terms of the economic and health impact of the coronavirus ‘we believe the market is likely to factor in a recovery in bank returns unless we see further economic deterioration.’

In re-rating these banks, UBS acknowledges that while NAB and Westpac will continue to see their net interest margins (NIMs) squeezed, with interest rates at historically low levels, and credit growth will continue to be ‘anaemic’ – achieving a return on equity (ROE) of ~9% remains possible.

At those ROE levels, UBS posits, that ‘if the banks were trading at 1x book value and were able to reestablish a dividend payout ratio of around 80% (given limited credit growth), this would imply they pay a dividend yield of around 7.2%.’

Overall, the investment bank now has Buy ratings on ANZ, NAB and Westpac, with CBA – the largest of the big four commanding a neutral rating.

At the time of publishing NAB's stock was up 2.88%, while WBC was up 3.47%.

How to trade bank stocks

What do you make of these developments: are you bullish or bearish on the big fours’ prospects? Whatever your view, you can trade the likes of ANZ, CBA, Westpac and even NAB – long or short – using IG’s world-class trading platform now.

For example, to buy (long) or sell (short) NAB using CFDs, follow these easy steps:

  1. Create an IG Trading Account or log in to your existing account
  2. Enter ‘National Bank of Australia’ or ‘NAB’ in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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