Morning Report / Income Report - Are we too late to switch CBA into Westpac? (NWH, CBA, WBC)

By Market Matters 18 February 21

Income Report - Are we too late to switch CBA into Westpac? (NWH, CBA, WBC)

Market Matters Income Report 18th February 2021

Reporting continues to dominate with some large stocks from an index perspective out with numbers today. We had some connection issues this morning thanks to Optus so ‘First Reactions’ was not included in the AM note, although it was recorded at the time – see the link below.

Below I cover CSL, STO, WES & OZL

MM have hit a landmine this morning with our holding in the Growth Portfolio, NRW Holdings (NWH) down 16%. We had this on the chopping block last week following the update from CIMIC, however volume in this stock is low so we held on, which has proven to be a mistake. We’ll cover the result in the PM note today however the key takeaway being, we’re holders, not sellers into this weakness and we believe the market has over reacted on the downside.

MM would be buyers of this weakness in NWH if we did not hold.

NRW Holdings (NWH) Chart

Overall, the ASX 200 is currently trading up +6pts / +0.10% to 6891

ASX 200 Chart

The Income portfolio added 1.24% to performance in the 5 sessions to Tuesday afternoon this week. Three holdings rose more than 5% - Telstra (TLS), Rio Tinto (RIO) & BHP – while no position gave up more than 2%. CBA paid a $1.50/share fully franked dividend. The portfolio remains well ahead of its benchmark for the current financial year, up 17.33% vs the RBA + 4% target of 2.63%. Inception to date the portfolio has delivered 7.23% p/a.

Are we too late to switch CBA into Westpac?

Markets can be frustrating and we’re particularly frustrated that we didn’t pull the trigger on our discussed switch from Commonwealth Bank (CBA) into Westpac (WBC). We dedicated an income note to this potential trade in December (click here), yet we failed to pull the trigger. Simply,  we need to be better at actioning views like this when the evidence and our research clearly highlighted an anomaly. We were bullish the banks, we believe they were overprovisioned and in that environment, the lesson is buy the laggard, buy the bank with the biggest leverage to the recovery, and that was clearly Westpac.

This is what we said in December of 2020:

Looking at the relative performance of banks over the past 3 years we see huge outperformance by the sectors No1 player, CBA while WBC underperformed significantly. It’s been a common trend for CBA to outperform, however not by this magnitude.

Bank Price Performance Chart

Making a longer term comparison of the weakest bank (WBC) with the strongest (CBA) shows the recent trend is more of an anomaly.

Westpac (WBC) White v Commonwealth Bank (CBA) Blue Chart

From an earnings perspective, CBA now trades on 19.2x versus the sector on 15.3x which represents a 26% premium. Overtime, this premium sits at an average of 15%.

Commonwealth Bank (CBA) P/E versus Sector

Westpac on the other hand generally trades on the sector average P/E, however is currently trading at an 8% discount, more than 1 standard deviation below the norm.

Westpac Bank (WBC) P/E versus Sector

If CBA is 9% expensive and WBC is 8% cheap, all things being equal there’s a 17% performance gap to close. I have to admit, I’m gun shy in selling the top performer to buy the weakest stock in a sector, there are many examples currently where the cream is rising to the top, however banks are different and history shows they generally mean-revert after periods of excessive out/underperformance.

Westpac (WBC) Chart

Commonwealth Bank (CBA) Chart

If we fast forward to today, WBC is trading up $4 / 20% higher while CBA is largely flat if we take into consideration the dividend. The 17% performance gap that was identified has now closed.

  1. Westpac (WBC) $24.39

Westpac’s trading update this week was solid with one clear standout being a $500m provision writeback. While we are bullish Westpac (WBC) and the banking sector more generally, the horse seems to have bolted in the short term.

MM likes WBC however we’ll stick with CBA for now

Westpac (WBC) Chart

  1. Commonwealth Bank (CBA) $83.39

CBA reported 1H21 results last week and the numbers were strong, and importantly, top line revenue growth was a healthy 4%. The underperformance they’ve experienced since then is simply a consequence of money moving it’s way down the quality curve of the sector. Overall, this is a bullish sign for the banks but a touch painful for CBA and the MM Income Portfolio in the short term.

MM are retaining our core position in CBA

Commonwealth Bank (CBA) Chart


We are very frustrated that we didn’t add value by switching from CBA to WBC

Now however, the horse has bolted in MM’s view

We will continue to monitor our bank holdings

Have a great day!

James, Harry & the Market Matters Team


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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