CBA, ANZ and NAB share prices: why outperformance may prove difficult

Though the Royal Commission may be over; Macquarie believes the big four banks aren’t out of the woods just yet, with the investment bank contending that earnings pressure is likely to continue into FY21.

The big four have had it tough lately.

The credit card business in Australia isn’t going too well, ultra-low interest rates are squeezing lending margins, and the Royal Commission raised a plethora of issues that are outside the scope of a single article. Oh, and Morgan Stanley – the ever respected investment bank – thinks it’s likely that ANZ and Westpac could soon face a dividend cut.

Macquarie Wealth Management’s view isn’t much more optimistic either. In fact, across the majors Macquarie doesn’t have a single buy recommendation and at the very least thinks Westpac will likely cut its dividend.

In step with this, Macquarie just recently updated its price targets for Australian bank stocks: here, ANZ has a share price target of A$28.00 and a neutral rating, CBA has an updated share price target of A$75.00 (a tidy A$3.00 ahead of its previous price target) and an underperform rating; and NAB has a neutral rating and a share price target of A$29.00.

The new ANZ, CBA and NAB share prices

A number of factors have driven Macquarie’s bearish sentiment around the Australian banking sector.

For one, the investment bank estimates that the current (and historically low) interest rate environment will have a negative profit impact on the banks deposit books, potentially reducing margins by 5 to 6 basis points. The Commonwealth Bank of Australia is expected to be the most impacted; while ANZ should be the least so.

Like Morgan Stanley, Macquarie also sees the Reserve Bank of New Zealand’s (RBNZ) potentially significantly stricter capital requirements as having a negative impact on the big four. Specifically, such a move from the RBNZ – which could see New Zealand CET1 requirements hit 14.5% – would trigger around a A$13bn capital short-fall, across ANZ, NAB and WBC, according to the investment bank.

Like Morgan Stanley, Macquarie expects that CBA won’t be impacted as significantly by these potentially higher capital requirements.

Long-term views

For those with long-term inclinations, Macquarie posits that bank earnings will ultimately be governed by the prevailing interest rate outlook.

Short-term views

But for those more interested in the next one to two years, Macquarie thinks the current low-rate environment will also impact the banks replicating portfolios (causing a 3 to 6 basis point hit on bank margins in the 2020 fiscal year) and deposit profitability (as previously mentioned, this could cause an additional 5 to 6 basis point reduction to bank margins). As a consequence of this, bank earnings are expected to come in lower in the near-term.

Specifically, this has led Macquarie to re-adjust its projections in regard to the big four’s cash earnings, EPS and DPS for the 2019, 2020 and 2021 fiscal years. Below we look at the impact this would have on ANZ, CBA and NAB.

For example, with these factors considered, Macquarie revised ANZ’s FY20 and FY21 cash earnings down by 0.7% and 0.5%, to A$6,236m and A$6,230m, respectively.

CBA’s FY20 and FY21 cash earnings are also expected to come in 0.4% and 0.7% lower, to A$8,701m and A$8,788m, respectively.

NAB, by comparison to ANZ and CBA and in percentage terms, is predicted to be the worst hit, with FY20 and FY21 cash earnings expected to come in 1.1% and 2.0% lower, to A$6,132m and A$6,204m, respectively.

With all this considered, it’s hardly surprising that Macquarie sees little room for outperformance in Australian bank stocks.

This is all even more interesting when considering that ANZ is set to report its FY19 results tomorrow, October 31.

Watch this space.

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