Seven Banking Stocks Amid Market Challenges

Commonwealth Bank of Australia


CBA Details

Rising Bad Debts: Commonwealth Bank of Australia (ASX: CBA) stock has fallen 5.3% (as of July 05, 2016) in the last four weeks on fears of Brexit. Meanwhile, CBA’s third quarter update revealed that there is a significant jump in bad debts to $427 million which is a 67% increase over the prior corresponding period.
 

Credit Quality (Source: Company Report)
 
In addition, the Australian Securities and Investments Commission is investigating claims handling by the Commonwealth Bank’s life insurance business at the back of a legal breach. Despite having a decent dividend yield, the stock has already fallen 12.7% in the six months (as of July 05, 2016) but we believe that the bank’s margin would be affected by falling interest rates. Morgan Stanley recently estimated that the big four banks may need to build up another A$17.5 billion or more in capital implying capital ratios rising to about 15% while Commonwealth Bank faces the largest capital build. With the ongoing turmoil in the markets, coupled with the Bank’s rising bad debt concerns, we give an “Expensive” recommendation on the stock at the current price of $71.97
 

CBA Daily Chart (Source: Thomson Reuters)
 
Westpac Banking Corp
 

WBC Details

Boosting capital position: Westpac Banking Corp (ASX: WBC) stock has fallen in the recent past impacted by the Britain’s vote of leaving the European Union. Meanwhile, like its peers WBC has also introduced rules to restrict the lending to foreign buyers over the past few months. Moreover, one of the division of Westpac Institutional Bank (WIB) was affected by lower net interest margins coupled with major impairment charges related principally to four large exposures which added $252 million to provisions, in the first half 2016.
 

Division performance (source: Company Reports)
 
The bank finished the offer of Westpac Capital Notes of over 17 million Notes issued at a Price of $100 each, to raise around $1.7 billion. However, WBC stock has already fallen 12.7% in the six months (as of July 05, 2016) and we believe that the stock would be affected in the coming months. Based on the foregoing, we give an “Expensive” recommendation on the stock at the current price of $28.20, and would review the bank at a later date.
 

WBC Daily Chart (Source: Thomson Reuters)
 
Australia and New Zealand Banking Group Ltd


ANZ Details

Strong dividend yield: Australia and New Zealand Banking Group Ltd (ASX: ANZ) stock has fallen 2.3% on July 06, 2016 like its peers owing to Brexit fears and Australian political scenario. Moreover, the bank has been under pressure in this year partly impacted by the bank’s first half of 2016 performance which reported 22% fall in profit to $2.7 billion. On the other hand, ANZ is undertaking solid initiatives to reposition the bank to deliver further growth. The bank is focusing on its consumer and small business franchises. ANZ is also expanding at New South Wales in Australia, while focusing on long term growth in Asia despite short term hurdles. The bank also has an outstanding dividend yield and is trading at attractive P/E. ANZ stock recovered over 4.14% in the last three months (as of July 05, 2016). Morgan Stanley recently estimated that ANZ faces the smallest capital build at the back of efforts to rebalance its institutional banking portfolio and the potential for asset sales, given the overall anticipation that the big four banks may need to build up another A$17.5 billion or more in capital implying capital ratios rising to about 15%. Despite short term pressure, we maintain our “Buy” on the stock at the current price of  $22.96
 

ANZ Daily Chart (Source: Thomson Reuters)
 
National Australia Bank Ltd


NAB Details

Declining LVR ratio: National Australia Bank Ltd (ASX: NAB) stock has been enhancing its fundamental position and lowered its loan-to-valuation ratio (LVR) to 70% from the more usual 80% and said it would evaluate lending to foreign buyers on a case by case basis. NAB has tightened the lending standards and will now consider foreign home loan applications for buyers with Australian income. In addition, the bank is focusing on Australia and New Zealand business and has a strong capital position.
 

Strong Capital Position (Source: Company reports)
 
NAB has announced for redemption of its US$600 million perpetual capital notes. The bank has a strong dividend yield and has paid interim dividend on July 05, 2016, while the stock has fallen 7.3% in the last one month (as of July 05, 2016). Given few positives in view of long term potential, we maintain our “Buy” recommendation on the bank at the current price of $24.54
 

NAB Daily Chart (Source: Thomson Reuters)
 
MyState Ltd


MYS Details

New associations and loan referral agreement establishment: MyState Ltd (ASX: MYS) recently reported that DirectMoney Limited (ASX: DM1) has established loan referral agreement with MyState Bank Limited which is a subsidiary of MYS. DM1 operates a marketplace lending business writing prime, unsecured personal loans for 3 and 5 year maturities to Australian consumers. The bank has also selected Rubik Financial Limited (ASX: RFL), a leading technology company catering to financial sector, as a partner for transformation of digital channels and customer experience offering. The technology solution will go live in August and will enable MYS to offer their customers a superior digital experience.
 

Sustainable dividend performance (Source: Company Reports)
 
The stock has fallen 13.32% in this year to date (as at July 05, 2016). However, MYS reported sound performance for 1H16 with underlying NPAT and EPS each rising 1.5%. We maintain our “Speculative buy” recommendation on the stock at the current price of $4.08
 

MYS Daily Chart (Source: Thomson Reuters)
 
Bank of Queensland Ltd


BOQ Details

Support from solid 1H16 Results: Bank of Queensland Ltd (ASX: BOQ) has fallen 24.84% in the last six months (as at July 05, 2016) given the volatile market scenario. Unlike other banks, BOQ re-priced housing loans in April and it is thought that the margin benefit will offset the impact from ongoing challenges. The bank delivered solid performance with 7% rise in cash earnings after tax in 1H 2016 over prior year while statutory profit after tax surged 11%. BOQ was back on track above system growth with new lending of $2 billion. Bank’s net interest margin of 1.97% remained the same amongst increased funding spreads and hedging costs. We give a “Buy” recommendation at the current price of $10.10
 

BOQ Daily Chart (Source: Thomson Reuters)
 
Bendigo and Adelaide Bank Ltd


BEN Details

Aligning with APRA regulations: Bendigo and Adelaide Bank Ltd (ASX: BEN) has risen 11.81% in the last three months (as at July 05, 2016). The bank’s full year financial results are due on August 08, 2016. The bank has lately amended the value of Charges for Specific Provisions and Write-offs for the period ending March 31, 2016.The bank along with regional banks, BOQ, ME and Suncorp recently welcomed the Australian Prudential Regulation Authority’s (APRA) announcement that it intends to implement a key recommendation of the Financial System Inquiry while confirming authorised deposit-taking institutions accredited to use the internal ratings-based approach to increase their average risk weightings on Australian residential mortgage exposures from approximately 16% to at least 25% from July 01, 2016. Market expects the bank to pay a fully franked 6.9% dividend in FY 2017 and may get a boost from application for advanced accreditation from APRA. However, we believe that the stock is “Expensive” at the current price of $9.38

 
BEN Daily Chart (Source: Thomson Reuters)

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