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Australian banks the least attractive in the region
Australian Financial Review Jun 8 2017 8:21 PM
James Frost
Australian banks are much less attractive to investors than their Asian rivals, with earnings forecast to grow less than 1 per cent in the 2018 financial year compared to double-digit growth available elsewhere in the region.
Forecasts from a banking analyst show that while earnings per share from banks in Hong Kong and Singapore are poised to spike, Australian bank earnings will be stagnant, putting the issues at play for international investors in context.
In a note titled "Are there any opportunities left?", UBS bank analyst Jonathan Mott spelled out how spiralling property prices in Melbourne and Sydney had compelled the regulator to act and how they might be inclined to intervene in the future.
He also considered how 26 years of interrupted household growth had led to a situation where elevated levels of household debt and rising house prices that were shrugged off despite being eight times disposable income.
"There are a number of very worrying clouds on the horizon," Mr Mott said.
UBS checks off a laundry list of concerns, including house price falls, further macro prudential intervention and the prospect of the bank levy being raised by future governments who wouldn't be able to resist the opportunity to raid the cookie jar and increase the levy when it suits them.
Not even a 6 per cent dividend yield and lower price to earning ratios – improved by the recent sell-off following the announcement of the bank levy – were enough to swing the analysts.
With bad and doubtful debts at record lows, Mott makes the point that every 2 basis-point rise on bad and doubtful debts will reduce EPS by 1 per cent.
"Across the major and regional banks we are left with no buy ratings, three neutral ratings and three sells. We are underweight the Aussie banks relative to both the Asian regional and global banks," Mr Mott said in a note to clients.
UBS distinguishes between the Hong Kong banks with international operations such as HSBC or Standard Chartered and the domestically-focused banks such as Hang Seng Bank, Bank of China and The Bank of East Asia.
It prefers Hong Kong's domestically-focused banks, with Bank of China the standout choice among the three.
UBS notes that Bank of China has been able to make the most of upward moving interest rate cycles in the past. It is the only buy rating the analysts have on a bank in the region.
Among Hong Kong's global banks UBS prefers HSBC to Standard Chartered, however the recommendation is not exactly a ringing endorsement.
"Given the vacuum of other compelling opportunities across Asia developed market banks, we include HSBC in our preferred list relative to Singapore and Asian banks."
The knock on Singapore banks follows a rally in share prices on the back of results which many believe show the top of the provisioning cycle (in sharp contrast to the Australian banks) which has in turn has seen valuations tested.
Improved margins and returns flowing from lower provisioning and higher rates would be a powerful tailwind for investors. Singapore's banks have the lowest price to earnings ratios in the region, contributing to the rally.
UBS believes that sentiment surrounding Singapore's banks such as DBS Group, OCBC Bank and United Overseas Bank is too bullish, however expressing concern about the potential for unemployment to rise and its impact on the small to medium enterprise segment.
