Trade idea - long ANZ/short CBA

I am interested in watching price action in ANZ given the A$3b cap raising when it re-opens.

Source: Bloomberg

The fact its CET ratio will increase to 9.3% (after the SPP and raising) should be taken positively and I would suspect a number of offshore traders will cover shorts. On this point, latest data here shows the short interest ratio in ANZ stands at 3.28 and we have seen short interest steadily building in the last few weeks, although at $20.67 million, short interest is not historically elevated.

There has been a fair bit of talk about the banks increasing capital of late and we already know ANZ have announced they are looking to sell its Escanda Dealer Finance business, which again should add an extra 15-20bp to its CET ratio, while we heard about a DRP in 1H15. They are also selling certain Asian assets, so all-in-all ANZ will be pretty close to the 9.8% minimum requirement disclosed by APRA through to July 2016.

ANZ also announced cash profit was A$5.4b (+4.3%) for the 9 months to June. This may disappoint somewhat and I note analysts were looking for 2-3% more. This seems largely down to bad and doubtful debts, which at A1.2B is possibly a touch higher than market forecasts. On a more positive note, the banks’ pre-provisioning looks slight better than forecast, with 5.1% growth.

CBA have already announced a DRP, but like ANZ will need more capital to hit the required mortgage risk weights. They report on 12 August, with the market looking for cash earnings of A$9.071b and an increased dividend to A$2.22 (from $2.18).

I am sceptical today’s announcement is the catalyst that will see the stock break its sideways move since May (highlighted by the 20-day moving average).

The best way to trade ANZ in my opinion is to offset a long position by being short CBA. So being long ANZ/short CBA, ensuring the nominal exposure on both sides is exactly the same and purely looking for outperformance from ANZ I feel is the best way to play the banks right now. I would also wait for the market to find a ‘fair value’ upon re-opening and this probably means waiting 30-60 minutes after the open.

Valuation just has to close from here.

In the last ten years CBA’s earnings multiple has never commanded a higher earnings premium to ANZ and the same is true for price/book. CBA currently trades on a price to book of 2.58x relative to ANZ on 1.68x

I feel there has been outperformance over the years from CBA, with the ratio moving from 1.4x in 2003 to where it currently stands at 2.68x. I feel this ratio can push down to the 2.0x level, but I would be closing the trade if the ratio moved higher into 2.85x.

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