With the worst now seemingly behind the banks, one leading broker believes that investors will be shifting their focus to dividend yields again.
According to a note out of Goldman Sachs, its analysts believe dividend yields will be one of the key drivers of the next leg of sector performance.
Goldman commented: "We believe the next leg of sector performance will rely on i) a recovery in sector earnings, with the peak in bad debts appearing to have occurred in FY20, ii) the expiry of APRA's 50% payout ceiling at the end of CY20, and iii) the continued re-rating of the sector's yield in light of low interest rates."
Based on its current forecasts, the broker estimates that the sector is currently trading on an attractive 6% nominal dividend yield in FY22/23E. This compares to the 5.5% long-run average.
Furthermore, this means an even more attractive 8% gap to the ten-year bond yield, well above the 3.5% long-run average. Something which Goldman Sachs sees scope to narrow over the next 12 months.
Which bank is Goldman Sachs' top pick?
At present, the broker believes the National Australia Bank Ltd (ASX: NAB) share price offers the best risk/reward. This is followed by Westpac Banking Corp (ASX: WBC) and then Bank of Queensland Limited (ASX: BOQ).
One of the reasons Goldman prefers NAB is due to its view that it will deliver better than peer revenue growth. This is expected to be supported by its superior management of the volume/margin trade-off.
Another reason it is positive on the bank is its investment spend, which it believes is further progressed relative to peers. This should allow NAB to be more selective towards where resources are directed, which supports its broadly flat FY 2021 costs growth target.
Ultimately, the broker believes the combination of the two will help NAB deliver top of peer Pre-Provision Operating Profit (PPOP) per share growth over the next three years.
Goldman Sachs has a conviction buy rating and $22.96 price target on NAB's shares.
And in respect to the other banks it is positive on, the broker has a buy rating and $20.34 price target on Westpac shares and a buy rating and $7.67 price target on Bank of Queensland shares.
