WBC

Sharemarket strategist and analyst Macquarie Research Equities have released an Australian banking sector update. The Australian banks have succumbed to a wave of selling in recent weeks, as sub-prime nervousness and associated tightness in credit markets have plagued the sector. Of the four majors, NAB has fared the worst, falling over 19% since its highs earlier in the year, closely followed by ANZ, which is 12% below its prior highs.

Australian stock market analyst UBS has provided an Austrlian banking sector update. They have earmarked Westpac (WBC) as the key Buy recommendation in the banking sector. Westpac (WBC) is their key buy post the appointment of Gail Kelly as CEO of Westpac (starts Feb-2008).

Westpac Banking Corporation (WBC) has a Buy recommendation and a share price target of $30 from Australian share analysts, UBS. Westpac is the first Australian bank to issue bonds during the credit crisis and tests the market with $850m bond issue. WBC announced it has issued $850m in 3 yr and 5 yr bonds. The 3yrs were priced at 32bp over swap and the 5 yrs at 42 bp over swap. They note: (1) Westbap Banking (WBC) wanted to "test the water" in the debt market. It believes that the banks need to take the lead to set a new benchmark following the credit market crisis; (2) Spreads on the 5 yr are c27-28bp wider than prior to the crisis (3yr slightly less) (3) Demand was strong, with the issue larger than the initial $500m target. However, the issue was much smaller than raisings prior to the credit crunch; (4) Other banks are likely to follow to term out their funding; (5) Some of this higher funding cost will likely be passed through to customers. Only a small deal, but a positive sign: Although this is a small deal relative to Westpac's $350b Balance Sheet and the spreads on this issue are less attractive than previously, we see this issue as a positive sign that some liquidity may be returning to the primary credit market. WBC is well positioned for current volatility. FY07 earnings confirmed: (1) No direct exposure to US sub-prime mortgages. (2) Funding & liquidity - Well diversified. 51% deposits, 27% ST, 18% Term, 4% Securitisation. Wider assets spreads & strong funding should support Majors. (3) Counterpart risk - Not expecting significant impact. $6bn in conduits, -12bp to ACE if brought on B/S. Key drivers for Westpac Banking Corporation (WBC): (1) New CEO appointment a positive (2) Rev-cost gap again positive. Risk: (1) Potential loss of executives (2) Gail has limited Insto or NZ experience. The analyst's price taqrget is based on DCF, SOTP, Int'l peers.

Australian banking shares have underperformed the market for a second week running from last week. Despite rising 0.4%, they still underperformed the market by 70bp. The two value plays, WBC and ANZ, rebounded strongly finishing the week up 2.9% and 1.4% respectively. However, partly offsetting this was NAB's underperformance. The bank’s recent UK analyst tour failed to turn sentiment around on the stock, which fell by 2.2% last week. Australian sharemarket analysts Macquarie Research Equities have the following major bank preferences: 1) CBA, 2) WBC, 3) ANZ, 4) NAB, 5) SGB. CBA remains their top pick in the sector with final results and final dividend being announced on 15th August 2007. CBA and WBC continued to dominate local debt market league tables: WBC and CBA continued to dominate the debt market issuance rankings in the June quarter, consistent with recent volume trends reported in their institutional division results. WBC maintained its number 1 position in the Australian syndicated loan market, with 15 issuances and 17.2% market share for the six months ending June. CBA improved its Australian debt market ranking significantly over the last six months, from fourth position a year ago to being number 1, though this partly reflects the large mortgage securitisation issue conducted during the period. This is consistent, though, with the message management put out recently that momentum continues to build within the bank’s institutional division. As a result, rejuvenation of CBA’s institutional banking is also likely to remain a key driver of CBA’s earnings growth in the short term. Personal bankruptcies deteriorate further: Personal bankruptcies in Australia deteriorated slightly further in the June quarter, with year to June bankruptcies increasing by 13% on pcp. Not surprisingly, NSW continued to be the key driver, rising 24% on a year-on-year basis. This is likely to continue to impact arrears levels for the banks in the near term, so far this has not translated into a significant increase in write-offs. The analysts believe that rising bankruptcy rates raise the risk that loss rates will increase more significantly, especially on unsecured personal lending, where these types of lending tend to account for a greater percentage of write-offs. NAB UK downgrades. Post NAB’s UK trip, the analysts have revised their UK forecasts leading to downgrades at the group level of 0.3% in FY07, and 1% in FY08. Their new price target for the Australian bank is $42.80.

Westpac Banking Corporation (WBC) has a Buy 1 stock recommendation and a share price target of $29.80 from Australian analyst UBS. WBC CEO’s has sold 600k WBC shares: WBC announced today that it’s CEO David Morgan has sold 600,000 WBC shares at an average price of $25.95. This represents one-third of his WBC portfolio, now 1,158,186 shares. The holding is valued at $30m at today’s closing price of $26.40. This follows the sale of 650,000 shares in 2006 and 475,000 shares in 2005. Shares will fund tax liability and assist in de-gearing: WBC released a statement in May pre-warning of the sell down and citing the key drivers as: (1) funding option-related tax liabilities and (2) to reduce debt in the CEO’s WBC portfolio. Quantitative indicators highlight insider selling as a negative share price driver. Next key event is the announcement of WBC's new CEO: David Morgan is due to finish his tenure as CEO of WBC in December. Given an external candidate is likely to need at least a three month notice period, we believe that the appointment of a new CEO (either internal or external) needs to be made sooner rather than later. WBC’s valuation looks reasonable to us at a 3% sector discount. Earnings growth appears underpinned by volume recovery. Revenue to cost spread is positive once more. However, CEO uncertainty is likely to continue to drag near term performance, in the analyst’s view. Their price target is based on DCF, SOTP, in comparison with international peers.

Australian sharemarket analyst Macquarie Research Equities (MRE) has some short term value ideas in the banking sector: ANZ & WBC. Rotation amid the rising bond yield environment saw the banks underperform last week. The sector ended the week up 0.2% (adjusting for SGB's dividend), while the cyclicals drove the market up 1%. Among the majors, NAB performed the best, rising 0.9% last week. The worst performer was WBC, closing down 0.8%. Though all three regionals finished in positive territory, they still underperformed the broader market.

Sharemarket analyst Macquarie Research Equities have provided a 2007/2008 Australian Budget Impact statement. Investors who had been eagerly awaiting the release of the 2007-2008 Budget were last night greeted with a host of initiatives that included a significant boost to household disposable income.

Market analyst UBS has provided an Australian banking sector update. System Credit strength continues in March +14.8%: 12 month credit growth at March-07 was 14.8%; comprising a steady increase in housing credit 14%, sound personal credit growth 12.1% & business credit maintaining high levels of growth at 16.6%. March growth was flat on February (revised down by APRA from 15%).

Market analyst, UBS, have aa Australian banking sector update: The Banking Sector is currently trading on 13.3x (2008E). This looks attractive relative to the market, with a PE Rel (All Indust ex Fin) of 76%. However, if the analyst looks at the implied PE of the banking divisions (ex Wealth Mgmt) the Sector is on 12.6x or a 27% discount to the market. (Valuing all bank's WM divisions at a 10% disc to AMP.) The marke analyst believes this implies (1) Banks are cheap. They are one of the few sectors in the market that have not re-rated over the last two years.

Analyst UBS has given an Australian banking sector update, and the influence of the deterioration in the US mortgage market and its implications for Australia. The analyst remains overweight on the Australian banking sector with ANZ, CBA and WBC having a Buy 1 broker call. Recent weeks have seen significant pressure on the US financial system driven by weakness in the mortgage market.