Which stock to buy among the big four banks?

The Government had announced for a six basis-point levy on the deposits of the country’s biggest banks in its recent annual budget, that will bring A$6.2 billion over next four years. With the implementation of the new levy, Australia's largest banks will pay the charge on their liabilities including corporate bonds, commercial paper, certificate of deposits and tier-2 capital instruments. However, ordinary bank deposits, mortgages and other deposits protected by the financial claims scheme will be excluded from the levy base. Further pressure was weighted on the big banks when one state decided to adopt a levy of its own and another expressed an interest in following suit. Further, Moody's Investors Service downgraded 12 Australian banks, citing elevated risks for the economy on account of massive household debt and stagnant wage growth.

Commonwealth Bank of Australia

CBA Details

Recently, Moody’s has lowered the Baseline Credit Assessment (BCA), long-term credit rating and Counterparty Risk Assessment (CRA) for CBA. It has lowered long-term rating for CBA to Aa3 from Aa2, while the short-term rating has been affirmed at P-1. However, the outlook on the rating has been revised to stable from negative. The rating of CBA’s New Zealand subsidiary, ASB Bank Ltd, has been lowered by one notch to A1 from Aa3. Currently, the CBA long term rating of Aa3 from Moody’s is in line with the current “AA-” long-term ratings assigned by Standard & Poors’ and Fitch Ratings.

Based on the Group’s financial position as on 31 March 2017, the bank estimate that the levy will amount to approximately $315 million per annum and $220 million after tax. The liability base on which the levy is calculated will exclude approximately $240 billion of deposits which are covered by the Financial Claims Scheme, 2017. Commonwealth Bank paid $3.6 billion in tax in the 2016 financial year and emerged as Australia’s largest taxpayer.  Given the concerns over operating and profit margins due to the increasing headwinds in the form of levies, we maintain an “Expensive” recommendation at the current price of $82.81


CBA Daily chart; (Source: Thomson Reuters) 

Westpac Banking Corp

WBC Details

Based on Westpac Banking Corporation’s balance sheet at 31 March 2017, recently announced 0.06% (6 basis points) levy in the 2017 Federal Budget will apply to approximately $615 billion of Westpac’s liabilities (‘Impacted liabilities’). However, the impacted liabilities would exclude certain prescribed items including approximately $174 billion of financial claims scheme eligible deposits. The Levy is expected to be tax deductible, but will not attract franking credits (Australian tax imputation credits). Based on the estimates, that represents a cost of around $370 million or around $260 million after tax. However, the exact cost will depend on the final form of the new legislation passed and the composition of Westpac’s liabilities. The impact of the Levy for shareholders was estimated at around 8 cents per share, which represents 4.3% of dividends paid (188 cents per share) in 2016. Given the impact of new levy and increasing pressure on net interest margins in the sector, we give an “Expensive” recommendation on the stock at the current market price of $30.51


WBC Daily chart; (Source: Thomson Reuters)

Australia and New Zealand Banking Group

ANZ Details

ANZ estimates that the annual monetary impact of the tax would be approximately $345 million on a before tax basis, and approximately $240 million after tax based on its financials as on 31 March 2017. ANZ’s balance sheet is also undergoing change due to strategic initiatives that will impact the size of the tax paid. Further, the net financial impact, including the Bank’s ability to maintain its current fully franked ordinary dividend, will be dependent upon business performance and decisions make in response to the tax.

Standard & Poor’s (S&P) has lowered its assessment of the standalone credit profiles of almost all financial institutions operating in Australia. As a result, S&P has downgraded its ratings on hybrid and subordinated debt instruments issued by ANZ by one notch in line with ANZ’s revised standalone credit profile, and affirmed senior unsecured credit rating at AA-(long term) and A-1+ (short term). The stock lost 10.1% in last three months (as at June 30, 2017), led by the new headwinds in the form of levy on banks liabilities coupled with challenging operating environment. However, we believe that the recent negative developments are incorporated in the current market price, and given the banks diversified portfolio, adequate liquidity and funding position with reduction in provisions, we maintain a “Buy” recommendation the stock at the current market price of $28.72


ANZ Daily chart; (Source: Thomson Reuters) 

National Australia Bank Ltd

NAB Details

Moody’s has downgraded the long-term ratings of NAB to Aa3 from Aa2 and the outlook was revised to stable from negative. On levies front, based on what the Government has announced, and applied to business as it stands, the tax could cost NAB approximately $350 million annually, or $245 million post tax. However, the actual cost will not be known until the final legislation for the tax has been passed and bank can fully assess its impact on NAB’s business.

For H1FY17, NAB reported a 2.3% increase in cash earnings on the back of lending and trading income, while there was a 0.8% rise in costs owing to higher redundancy and general expenses (technology depreciation costs). The total bad debt increased by $19 million to $394 million and included an increase in provision overlays of $89 million for potential risks relating to the commercial real estate portfolio. Further, net interest margin fell by 11 basis points.  Banks Common Equity Tier 1 (CET1) ratio stood at 10.1% as at 31 March 2017, an increase of 42 basis points in H1FY16. Importantly, the group has provided a subdued growth outlook due to challenges in the operating environment. In last three months, the stock has declined 10% in line with the peers owing to sectoral headwinds. We give an “HOLD” recommendation on the stock at the current market price of $29.59


NAB Daily chart; (Source: Thomson Reuters)

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