Morning Report / Has CBA set a positive tone for the Australian banks? (CBA, BOQ, ANZ, CYB, SUN)

By Market Matters 09 August 18

Has CBA set a positive tone for the Australian banks? (CBA, BOQ, ANZ, CYB, SUN)

Market Matters Morning Report 9th August 2018

**Direct From The Desk – AUDIO – James Gerrish covers the SUN result this morning – CLICK HERE TO LISTEN**

Yesterday the ASX200 rallied 14-points which was a very lacklustre performance considering CBA contributed +11-points. We are now into the 5th week of treading water between 6200 and 6300 with many posing the question “what will change this newfound comfortable equilibrium”?

On a number of occasions over recent decades the ASX200 has actually led global indices and at MM our “gut feel” is the failure of local stocks to embrace the US markets strength adds weight to our view that the next 10% move at least, is down.

Investors often become very impatient expecting stocks / markets to deliver almost as fast as Domino’s but in reality, it’s very rarely the case, our analysis shows that market “tops” whether minor or major usually take ~2-months to evolve before finally correcting.

  • We are neutral the ASX200 while the index holds above 6140 but we remain in “sell mode” albeit in a patient manner.

Overseas markets were quiet with a late sell-off erasing earlier small daily gains, the futures are pointing to an unchanged opening by the ASX200.

Today’s report is going to look at the widely held banking sector following CBA’s ‘better than feared’ result yesterday from  yesterday.

ASX200 Chart

 

The US banking sector has revelled in Donald Trump’s combination of tax cuts and relaxed regulatory conditions with sector up 100% since the 2016 lows, whereas the Australian banking sector remains over 20% below its 2015 high.

However, with the costly Hayne Royal Commission slowly coming to its conclusion and housing prices already slipping we question where the fresh bad news will come from for the embattled sector..

S&P500 banking Sector Chart

1 Commonwealth Bank (CBA) $74.81

Yesterday’s result was better than feared from CBA with the underlying trends in the business showing many positive trends -  one aspect that caught my eye was around the underlying “Jaws” which was a positive 0.3%.

Jaws ratio = Income Growth Rate - Expense Growth Rate

The fact CBA grew underlying income at a greater rate than expenses through what can only be described as a horrific period for the bank is remarkable, and speaks to the underlying quality of the franchise. In our opinion the markets become way too bearish the banking sector, at least until we see any serious contributors on the disruption front. A number of prominent funds have enjoyed proclaiming their lack of / small exposure to Australian banks, it feels like the sellers / “shorters” are set so the downside feels limited to us.

CBA is currently trading on a conservative P/E for 2019 of 14.5x while yielding an attractive 5.75% fully franked.

·         MM is bullish CBA while it can hold above the $72 area.

Commonwealth Bank (CBA) Chart

2 ANZ Bank (ANZ) $28.82

Over recent times ANZ has outperformed the other “big four banks” falling -3.6% over the last year. Their announced $3bn buyback is certainly supporting the stock and helping the overall perception towards the bank.

ANZ is currently trading on a conservative P/E for 2018 of 12.6x while yielding an attractive 5.55% fully franked.

·         Technically we like ANZ with an ideal entry around $28.

ANZ Bank (ANZ) Chart

 

3 Bank of Queensland (BOQ) $10.91

Regional bank BOQ is the worst performing of the Australian banks falling -11.8% over the last year. Like other banks we believe too much bad news is built into BOQ but the risk / reward feels better at the larger end of town

BOQ is currently trading on a conservative P/E for 2018 of 11.9x while yielding an attractive 7.7% fully franked.

·         MM prefers other banks in the sector, currently only liking BOQ back under $9.50.

Bank of Queensland (BOQ) Chart

 

4 CYBG Ltd (CYB) $6.31

UK based CYB has been the standout bank on the ASX200 over the last year rallying +31.7% in an index that has fallen -0.9%. At MM we’ve enjoyed much of these gains but recently took profit as the stock hit our target trading above $6.

We acknowledge that we may be forced to rebuy CYB at a higher price in the future but from a risk / reward perspective MM likes being an observer for now.

CYB is currently trading on a higher P/E for 2018 of 15.8 while paying a tiny ‘token’ dividend.

·         MM is currently neutral CYB.

CYBG Ltd (CYB) Chart

 

5 Suncorp Group (SUN) $14.99

Obviously, SUN is both a banking and insurance business but as it’s our largest holding and reported this morning it was an opportune to include it in today’s section.

RESULT; On first read through this looks like a great result with the company exceeding expectations across most metrics while we’ve also seen an 8cps special dividend. They announced the sale of their life insurance business and have guided to 10% ROE in 2019 which is good. They also intend to return ~$600m capital to shareholders, which is about 46cps from the sale.  All in all, a great result and the stocks should trade higher this morning on the back of it

SUN is currently trading on a higher P/E for 2018 of 18.7x while yielding an attractive 4.9% fully franked.

·         We continue to look to take profit on SUN between $15.20 and $16 – expect an alert this morning to trim 2% of our holding above $15.30

Suncorp (SUN) Chart

 

Conclusion (s)

We believe the Australian banks represent solid value at current levels and will enable the ASX200 to outperform its peers if/when we see a global correction in stocks.

Overseas Indices

The S&P500 still looks destined to make fresh all-time highs in the next few weeks, this has been our preferred scenario for months with the big question “will it fail around 2900?”.

·         MM intends to increase our BBUS short US ETF position into further strength.

European indices continue to trade sideways in a relatively similar manner to the ASX200.

US S&P500 Chart

UK FTSE Chart

 

Overnight Market Matters Wrap

·         The SPI is flat after a largely directionless night in US equities. The DJIA fell 0.2% and the S&P 500 closed just 0.03% in the red. The NASDAQ eked out a small gain, +0.06%.

·         China announced a 25% tariff on an additional $US16B worth of US imports from August 23, in retaliation to US tariffs announced yesterday. US investors don’t seem too worried by these tit-for-tat tariffs as the S&P 500 sits just below its all-time high. Chinese markets have fared far worse. The Shanghai Composite for example has fallen ~17% since March.

·         Aluminium and nickel were the standouts on the LME with good gains, iron ore was better, while oil fell more than 3% after a smaller than anticipated inventory draw.

Have a great day!

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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