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Three Banking stocks – Is there a Compelling Opportunity?

Sep 21, 2015 | Team Kalkine
Three Banking stocks – Is there a Compelling Opportunity?

Australia and New Zealand Banking Group



Delivered decent earnings performance, focusing on super regional strategy: Australia and New Zealand Banking Group (ASX:ANZ) generated decent performance in spite of the CET1 ratio pressure, with the group’s cash profit surging by 4.3% year-on-year (yoy) to $5.4 billion in the nine months ended on June 30 of fiscal year of 2015. Statutory profit improved by 11% yoy to $5.6 billion in 2015, against $5 billion in prior corresponding period (pcp), on the back of better customer franchises across Australia, New Zealand and Asia Pacific. Customer deposits witnessed solid performance with a surge of 9.5% on a year over year basis, driven by net loans and advances increase by 7.7% yoy during 2015. The bank is also selling its Esanda dealer finance business, an $8.3 billion business of loans to motor vehicle dealers, to focus on its core business. In fact, the latest update reveals that the Australian antitrust regulator has given the decision of not opposing a possible bid from Macquarie for ANZ’s vehicle-finance unit. Global markets business income for ANZ rose 6% yoy to $1.8 billion during the nine months ended on June 30 of fiscal year of 2015, while the customers for International and Institutional Banking improved 9% yoy, boosted by Asian business. ANZ is heavily focusing on its Asian business growth and launched a “super-regional strategy” program to build a solid presence in Asia as compared to its Australian peers.


Year to date as at June 2015 performance (Source: company reports)
 
Stock Performance: ANZ shares have been under pressure this year, and witnessed a decline of over 13.7% year to date (as of Sep 21 close) on investors’ concerns of impact of CET-1 ratio requirement and tough market conditions in China (which would impact the bank’s Asian business). On the other hand, ANZ clarified that its China assets have a stronger average credit rating than the bank’s Institutional assets in Australia and New Zealand. Moreover, China’s Exposure at Default comprised only 3% of the bank’s EAD, while its total Institutional Asia Exposure constituted 12% of the group’s EAD. The bank is also trading at a relatively cheaper P/E of 10.5x, as compared to its peers like MYS (P/E of 11.8x) and WBC (P/E of 13.1x). Having a decent annual dividend yield of 6.4%, we maintain our bullish stance on the stock at the current price of $27.72.


ANZ Daily Chart (Source: Thomson Reuters)

National Australia Bank



Strong Outlook despite UK Pressure: National Australia Bank Ltd (ASX: NAB) stock continued to be under pressure, even though the bank reported a revenue increase of 4% on a year over year basis during the third quarter of 2015. NAB estimates an additional £500 million impact from its UK operations as well as increased the provision to the range of £290 million and £420 million, related to Clydesdale Bank for the 2015 full year results. The shares fell over 6.3% in just last three months (as of Sep 18 close). On the other hand, NAB had already diverted over a £1.7 billion funds under its conduct mitigation package. National Australia is also focusing on its core business, and accordingly improved its asset quality in Australian and New Zealand business and took initiatives to deal with its legacy issues. NAB invested on its home lending, SME and Specialized Business, to improve customer experience as well as improved its business banking loan portfolio and wealth business. National Australia bank also offers attractive valuation as compared to its banking peers, and trading at a P/E of 12.7x. The group has an annual dividend yield of 6.4% while its return on equity is 10.9%.


NAB Daily Chart (Source: Thomson Reuters)

Based on the foregoing, we give a “BUY” recommendation to National Australia Bank at the current stock price of $30.47.



National Australia Bank’s credit risk exposure (Source: company reports)
 

Bank of Queensland



Acquisitions and focus on new channels to drive growth: Bank of Queensland Limited (ASX: BOQ) reported an increase of 19% of after tax cash earnings to $167 million for the first half of 2015, from $140 million in the corresponding period of last year. Synergies from BOQ specialist acquired by the group during July 2014 contributed to the performance Specifically, BOQ specialist business contributed a net profit after tax of $19 million, in line with the bank’s estimates and is further expected to achieve a full year target of $38 million earnings guidance. The statutory profit after tax surged by 14% on a year over year basis to $154 million. Bank of Queensland improved the fully franked interim dividend by 13% yoy to 36 cents per share during the first half of 2015, from 32 cents per share in the corresponding period of 2014. The bank intends to deliver growth through its channels like BOQ specialist, broker and virgin money mortgages, and BOQ is in line to achieve its guidance of 45% of cost to income ratio during the second half of the year. The group’s efforts to offer on-balance sheet mortgages to BOQ specialist customers is generating better results than forecasted, which would further boost BOQ performance. The bank recently raised over $150 million by issuing Wholesale Capital Notes at a margin of 4.35% over the 6 month Bank Bill Swap Rate. Meanwhile, BOQ’s total capital ratio increased to 12.4% in May 2015, from 12% in February 2015. The bank is trading at a reasonable P/E of 15.8x and has an annual dividend of 5.7%.


BOQ Daily Chart (Source: Thomson Reuters)

We remain bullish on BOQ and give a “BUY” recommendation at the current price levels of $11.95.



Capital adequacy (Source: company reports)

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