The week ending Thursday was a topsy-turvy one for the Australian market, with the ASX ultimately ending down 1.9 per cent. However, the big four banks on average rose 0.7 per cent. The notable loser was Commonwealth Bank, down 3.5 per cent which is unsurprising given both a positive profit warning and confirmation from its first half result gave CBA shares a significant boost over the last fortnight. ANZ was the big gainer at six per cent.
ANZ might reasonably be considered the loser of the last couple of weeks' revelations in the banking sector. We had confirmation of a better than expected increase in revenues in the CBA result, and a similar disclosure from a National update. An update from ANZ showed it not to have enjoyed such spoils, so the market reacted accordingly. This week's rise in ANZ shares suggests there are those who believe ANZ has been hard done by.
Westpac also received a boost from the CBA and NAB news, as the market assumed the supposed "best" bank in the group must also have been reaping in better revenues if the other two had. Such assumptions were confirmed this week when Westpac issued a quarterly update, but a 2 per cent rise in WBC shares this week indicates any good news was already (mostly) accounted for previously.
The other banking news of significance this week came with the release of Bendigo & Adelaide Bank's half year profit result. To compare the Westpac and Bendigo updates is to illustrate the widening gap between the Australian national and the regional institutions - the big four and the have-nots. And such comparison also highlights the dichotomy running in all banks at present - the battle between revenues and bad debts.
Westpac did not disappoint, showing that improvements were made in the areas of revenue, capital, funding and liquidity. What sets Westpac apart from the others, nevertheless, is last year's acquisition of St George. Since that time, the market has been somewhat wary of Westpac, for the simple reason that one does not absorb the fifth largest bank in the country, in order to become the largest bank in the country, without any integration risk.
Analysts, however, have always been more confident then the market that Westpac can successfully release synergies. That's why Westpac enjoys the best FNArena database buy/hold/sell ratio among the big four at 4/4/2. They were quick to point out this morning that Westpac's capital ratio has now caught back up with the others and, what's more, that the St George acquisition is skewing the bank's operations more towards low-risk mortgages and wealth management accounts.
By contrast, the NABs and ANZs of the world are still dealing with risky exposures in the UK and Asia respectively, as well as an overhang of toxic assets of the US variety.
That's the good news. The bad news is that Westpac has been forced to put away more provision for bad debts - more than most analysts expected. For all banks, big or small, the global financial crisis is offering up one very simple, yet hard to estimate, risk - increasing bad debts.
In Westpac's case, the provisions in question largely centred around those same old "single names" - ABC Learning, Allco and Babcock & Brown - and did not otherwise reflect a sudden unexpected jump in collective smaller bad debts. Nor does Westpac expect any new "single name" shocks to emerge, so management is happy with the provisions now in place.
Some analysts agree, but others are left uneasy. Citi analysts, who seem to have adopted the mantle of Australia's most bearish bank analysts (even more so than JP Morgan) go as far as to suggest Westpac will end up having to raise more capital down the track. Citi assumes every bank will have to raise more capital, cut dividends, or both.
No ratings changes arose from the Westpac update within the FNArena database but the average target dropped 3.7 per cent to $17.94 - 6.7 per cent above the current share price.
The same cannot be said for Bendigo & Adelaide, which this week suffered two ratings downgrades from Hold to Sell. This left an unflattering buy/hold/sell ratio of 0/6/4.
Bank analysts were fully aware of such difficulties when they made their estimations for Bendigo's first half profit. But they were still being too optimistic. Bendigo's operating margins had been eroded even further than all analysts had anticipated. The flipside of being smaller, however, means less debts to turn bad. But even then, Bendigo's bad debts were worse than expected.
Analysts were forced to quickly reduce earnings forecasts for the full year. The announced dividend was also a disappointment. Securities analysts are now worried Bendigo's gearing level is too high and its bad debt provisions too low. Whereas the Westpacs of the world are enjoying improved revenues as an offset to bad debt growth, for the regionals it is the other way around.
Bendigo's average target price fell 17 per cent to $9.22 as two brokers moved to join two others already on sell.
Such is the tale of the Australian banking sector at present. Size matters. What has also become noticeable to a large extent is as Wall Street has fallen recently, it is the banks still leading the charge. In Australia, the banks are fighting back. At least the big ones.
FNArena