In the eye of the storm: In our maiden trip to meet Australian banks, we
went with a background that they provided a recipe for stress going into the
credit crisis: high loan-deposit ratios, wholesale funding, relatively thin
capitalisation and loan growth running at double the GDP growth rate for an
extended period.
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Weathered the crisis surprisingly well: With only a slight dent to profits on
the back of credit costs, banks fared much better than expected through the
crisis due mainly to massive (6% of GDP) and early government support
along with sharply lower interest rates. Operating profit actually improved as
net interest margins expanded, breaking their decade-long erosion.
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20% ROEs possible by 2012E: Our Australian banks analyst, James Ellis,
forecasts banks will reach 17.0% ROEs by 2011, up from 13.7% in 2009E.
Taking that trajectory forward, ROEs could reach 20% in 2012 as credit
costs normalise further and banks conduct some share buybacks.
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However, stock prices already discount the good news: At 15.0x 12-
month forward P/E versus five-year average of 9.6x, Australian banks are
decidedly costly vis-a-vis history and the domestic market. On Sakthi Siva’s
P/B-ROE relative model, they trade at a 25% premium to APxJ financials.
Still, the stocks have been performing well this year as international
investors are probably using these large liquid names as proxies for the AUD
exposure. James’s preference is for CBA followed by NAB.