Banks
A dose of economic reality
Some thawing in debt markets and bolstered capital positions provide some
optimism going into 2009. However, the big swing factor is still likely to be bad
debts, which will peak at 95bp in FY10F. We remain Underweight. WBC becomes
our top pick followed by ANZ. CBA is our least preferred stock in the sector.
Table 1 : Key recommendations & forecasts
Reuters Year end Recom Price Target
price
Upside/
downside
EPS
1fcst
P/E
1fcst
ANZ Banking Group ANZ.AX Sep 2009 Hold A$14.30 A$15.11 6% 1.45 9.9
Bank of Queensland BOQ.AX Aug 2009 Hold A$9.00 A$10.30 14% 1.01 8.9
Bendigo & Adelaide Bank BEN.AX Jun 2009 Hold A$10.15 A$9.61 -5% 0.93 10.9
Commonwealth Bank CBA.AX Jun 2009 Sell A$27.35 A$27.63 1% 2.58 10.6
National Australia Bank NAB.AX Sep 2009 Hold A$19.35 A$18.96 -2% 2.21 8.8
Westpac Banking Corp WBC.AX Sep 2009 Hold A$16.11 A$17.12 6% 1.80 8.9
Priced at close of business 16 January 2009.
1. Normalised EPS - pre non-recurring items and post preference dividends
Source: Company data, ABN AMRO forecasts
From financial crisis to economic slowdown
We believe 2009 will be characterised by the impacts of the financial crisis on real
economies. We expect the Australian economy to be in recession with many indicators
already at recessionary levels. Depending on the form Fiscal and Monetary stimulus will take
time (6-24 months) however it is inherently unclear as to whether international efforts will be
enough.
Going into 2009, Aussie banks have capital, but will need it
Each of the Australian banks has raised equity to bolster their balance sheets and bring their
Tier 1 ratios above 8%. We believe this will be needed as bad debts continue to rise and
move from financially leveraged companies to small business and the consumer as
unemployment rises. Our average bad debt levels peak at 95bp in FY10F.
Bank performance during different stages of a recession
Our analysis of relative bank performance around recessions suggests that banks
underperform on expectation of a recession before going through a short period of
outperformance during the early stages of a recession. We believe the short period of
outperformance relates to industrial downgrades rather improvement in banks given absolute
share price performance is still significantly negative. Underperformance then returns at the
back end of recessions as bad debt levels peak . Post a recession, relative performance is
varied and tends to depend of the strength of the recovery.
Investment view – maintain Underweight, looking for positive signs
The combination of bolstered capital positions together with the initial signs of a thawing in
credit markets provides some optimism going into 2009. However, given a continuing
declining outlook and earnings risk still to the downside, we maintain our Underweight sector
rating. With recent relative movements in the share prices of the Australian banks, WBC
becomes our top pick in the sector followed by ANZ. CBA is our least preferred. Of the
regionals, our preference remains BOQ but we acknowledge that short-term share price
performance is likely to be clouded until the outcome of project pathways is known.

Contents
A dose of economic reality 3
Some thawing in debt markets and bolstered capital positions provide some
optimism for 2009. However, the swing factor is still bad debts, which we believe
will peak at 95bp in FY10. We maintain our Underweight sector stance.
3
A year of experimentation 7
While the macro environment is set to deteriorate, governments are sowing the
seeds of recovery. While these programmes have worked in the past, there is a
general consensus that this time things are different.
7
Macro environment continues to deteriorate 7
Australian banks – Conditions have never been better…except for funding 10
Risks or opportunities? 12
The environment provides banks with more earnings risk than opportunities
(slowing growth and bad debts) in our view. We believe the repricing opportunity is
overstated given the level of repricing required over now higher funding costs.
12
Asset growth - poor outlook and funding constraints are likely to dampen any upturn 12
Margins – some relief in sight however funding pressures and competition are likely to erode
repricing benefits
13
Bad debts – likely to continue to pick up as the environment deteriorates and shocks continue 15
Capital issuance – capital at a premium – banks to be consumers and focus on capital-efficient
growth
16
Testing time 17
The macro outlook is set to dominate how the banks trade this year. While there is
a lot of uncertainty, the market tends to factor in a recession fairly early for the
banks; hence, the banks have overall underperformed prior to this recession.
17
Bank share price reactions before, during and after recessions 17
Absolute and relative overweight - what would we need to see for banks to rally? 21
What sort of recovery are we likely to see? 22
Company profiles 25
ANZ Banking Group 25
Bank of Queensland 31
Bendigo & Adelaide Bank 37
Commonwealth Bank 43
National Australia Bank 47
Westpac Banking Corp 53