Last week Goldman Sachs released an in-depth research update on Australia's major banks, stating value was emerging and placing a "buy" rating on Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC). In fact, all the Big Four banks are currently trading below the global investment bank's 12-month price targets.
The report suggests downside risk from the upcoming royal commission is already more than factored into current prices and that banks will continue to grow earnings per share and pay high-yield dividends. Capital returns to shareholders are also expected to accelerate in FY2018, and the report's analysts have forecast Westpac to pay a special dividend in the second half, in addition to the $1.5 billion share buy-back already announced by ANZ.
ANZ is Goldman Sachs' preferred pick in the sector, due to the bank's portfolio rebalancing strategy showing improved profitability, cost-cutting measures, equity buy-back scheme and Common Equity Tier 1 (CET1) leadership among peers. ANZ has been added to the firm's "conviction list" with a 12-month price target of $33.40, which is close to 17% higher than the current share price.
The "buy" call on Westpac has also been reiterated, as Goldman Sachs expects the bank to generate sector-leading earnings per share growth of 3.8% in FY2018, on the back of net interest margin expansion. Westpac has a 12-month price target of $36.44, an almost 18% premium to the current market price.
National Australia Bank Ltd (ASX: NAB) is rated as "neutral", which I found somewhat surprising given the share price is 19% lower than Goldman Sachs' 12-month price target of $34.56. Analysts see NAB's improvements in its business banking arm and a recovery in domestic business lending as a key driver of future earnings growth.
Australia's largest and historically best-performing bank, Commonwealth Bank of Australia (ASX: CBA), has also been given a "neutral" rating by Goldman Sachs with a 12-month price target of $80.98. Increased regulatory scrutiny remains a potential downside risk, as the bank awaits the outcome of civil penalty proceedings related to alleged breaches of Anti-Money Laundering legislation.
After a poor 2017, the major banks are again underperforming the broader market so far in 2018. Amid improving global economic conditions, a potential catalyst for a bank re-rating could come within the next week and a half, as CBA announces its half-year results on February 7. ANZ, Westpac and NAB will all release their interim results in May.
