MENU

Morgan Stanley picks its favourite big bank stock despite warning of a $2b hit to the sector

Source: Australian Broadcasting Corporation

The upcoming bank reporting season could be a testing time for shareholders as Morgan Stanley quadrupled its customer refund and remediation estimates for the big four banks.

The broker believes Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) will need to cough up $2 billion in the current financial year.

The share prices of the four banks are underperforming the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index but don’t expect a turnaround in sentiment when three of the big four (CBA has already reported) hand in their profit report cards next month.

While the results aren’t likely to come much as a surprise with the likes of ANZ Bank already issuing profit downgrades ahead of time, there’s still scope for bad news in their outlook statements and Morgan Stanley has identified six things shareholders should be keeping a close eye on.

The first is the trend in funding costs (which have been rising) and plans for future margin management. The second is reinvestment and cost-cutting strategies followed by expectations for customer remediation and compliance programs.

Next is the composition of housing loan growth and signs of improvement in business loan growth, while capital generation/capital management opportunities and changes/progress on non-core asset sales round out the last two.

Among the banks reporting, ANZ Bank is most a risk of disappointing investors, according to Morgan Stanley.

“ANZ has more scope than peers to navigate the difficult transition facing Australian banks, a commitment to lower costs and ongoing capital management options,” said the broker.

“However, these investment characteristics are well understood, revenue headwinds are getting worse and it has re-rated vs peers.”

In contrast, Westpac is quite the opposite with the stock already de-rated and is the worst performing bank over the past year as it is more exposed to the end of the mortgage bull market than its peers.

This means the stock could rebound, as long as management can convince investors that things are getting worse for the bank.

But I think there are better blue-chip buying opportunities elsewhere and even Morgan Stanley isn’t excited about the value bank stocks offer as it rates ANZ and Westpac as “equal-weight” while NAB and CBA are “underweight”.

The good news is that the experts at the Motley Fool believe there are three other blue-chip stocks that make a much more enticing investment.

Click on the free link below to find out what these stocks are.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.