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Are the banks a sell?

The recent 1H18 results released by Australian and New Zealand Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) were disappointing according to a report by UBS. The outlook ahead is undoubtedly tough, notwithstanding the Royal Commission into banking. 1H18 earnings per share for the big four fell an average 3.7%, due to slowing credit growth, and rising costs from National Australia Bank’s restructuring and Commonwealth Bank’s provisions for anti-money laundering fines and compliance. Stressed exposures were up as well as increasing number of mortgages in arrears. On the positive side, there was improved asset quality with less corporate losses and ongoing recoveries, and net interest margins expanded due to mortgage repricing.

UBS says that management commentary on the outlook was more cautious than has been seen for a long time. Average dividend yield for the big four of 6.2% is hard to ignore and the big four average valuation is not expensive at 13x FY19 earnings, but the increasing risks lead to UBS taking a very cautious view.

UBS’s reasons to be cautious on the banks are:

  • Tighter credit standards
  • Slower credit growth
  • Higher funding costs
  • Lower net interest margins due to competition and resetting of interest only loans
  • Rising legal and compliance costs.

Of the four major banks, Westpac is trading on the lowest forward price-earnings-ratio (PER) of 12.3x at the time of writing, and is paying an annual dividend yield of 6.4%. While both National Australia Bank and Commonwealth Bank are trading on a forward PER of 12.6x and annual dividend yield of 7% and 6.1%, respectively, while ANZ is trading on a forward PER of 13x with an annual dividend yield of 5.7%.

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Motley Fool contributor Rosemary Steinfort owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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