Australia's Lowest-Risk Major Bank Stock with Leading Market Shares Across Key Consumer Products

Major Bank Retail Customer Satisfaction Declines, but Still a Remarkably High 79.5%

Challenges Mount for the Wide Moat-Rated Australian Banks

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Thematic (Sector/Industry)

Australia Financials / Thematic (Sector/Industry)

The big picture for Australia’s four wide-moat major banks is playing out as expected. Loan growth is slowing but only modestly; net interest margins, or NIMs, are under pressure but are well managed; operating cost growth lags revenue growth; and bad debts will continue to increase from historical low levels. We expect the four major banks to need approximately AUD 20 billion in new capital during the next three to four years to fund asset growth and satisfy future capital regulatory requirements. As a result, EPS growth is expected to slow, dividend payout ratios should fall to long-term trend levels, and return on equity, or ROE, will decline by 2 percentage points on average to still-attractive levels of 12%-14%. A stronger-than-expected performance from the Australian and New Zealand economies could surprise. In our view, the business, economic, political and operational concerns affecting the banks are not as bad as the market fears, and we do not expect the major banks' privileged position to change any time soon.
The major banks look fairly valued based on current average one-year forward P/Es around 12 times, with the 10-year average one-year forward P/E for the major banks at 11.9 times. <a href="https://www.smartkarma.com/entities/14" target="_blank" data-smartkarma-citation="entities:14:1" rel="noopener">Commonwealth Bank Of Australia (CBA AU)</a> and <a href="https://www.smartkarma.com/entities/444" target="_blank" data-smartkarma-citation="entities:444:1" rel="noopener">Westpac Banking Corp (WBC AU)</a> are the most attractive, trading at a 13% discounts to our respective fair value estimates of AUD 85 per share and AUD 35 per share. <a href="https://www.smartkarma.com/entities/443" target="_blank" data-smartkarma-citation="entities:443:1" rel="noopener">Aust And Nz Banking Group (ANZ AU)</a> is fairly valued, based on our AUD 28 fair value estimate, and <a href="https://www.smartkarma.com/entities/15" target="_blank" data-smartkarma-citation="entities:15:1" rel="noopener">National Australia Bank Ltd (NAB AU)</a> is trading 7% below its AUD 30 valuation.
Analyst: David Ellis

The big picture for Australia’s four wide-moat major banks is playing out as expected. Loan growth is slowing but only modestly; net interest margins, or NIMs, are under pressure but are well managed; operating cost growth lags revenue growth; and bad debts will continue to increase from historical low levels. We expect the four major banks to need approximately AUD 20 billion in new capital during the next three to four years to fund asset growth and satisfy future capital regulatory requirements. As a result, EPS growth is expected to slow, dividend payout ratios should fall to long-term trend levels, and return on equity, or ROE, will decline by 2 percentage points on average to still-attractive levels of 12%-14%. A stronger-than-expected performance from the Australian and New Zealand economies could surprise. In our view, the business, economic, political and operational concerns affecting the banks are not as bad as the market fears, and we do not expect the major banks' privileged position to change any time soon.
The major banks look fairly valued based on current average one-year forward P/Es around 12 times, with the 10-year average one-year forward P/E for the major banks at 11.9 times. Commonwealth Bank Of Australia (CBA AU) and Westpac Banking Corp (WBC AU) are the most attractive, trading at a 13% discounts to our respective fair value estimates of AUD 85 per share and AUD 35 per share. Aust And Nz Banking Group (ANZ AU) is fairly valued, based on our AUD 28 fair value estimate, and National Australia Bank Ltd (NAB AU) is trading 7% below its AUD 30 valuation.
Analyst: David Ellis

The Big Picture for the Major Banks Is Playing Out as Expected, but CBD Apartment Risk Is Increasing