Goldman Sachs has been looking at the banking sector this week and has given its verdict on the state of the sector.
This follows the release of the Commonwealth Bank of Australia (ASX: CBA) first quarter update earlier this week, completing the banking reporting season.
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What is Goldman Sachs saying about the big four banks?
According to the note, the broker believes that upside risk to sector earnings is now diminishing.
This is due to net interest margin tailwinds being partially offset by headwinds from competitive pressures and cost inflation. Goldman also expects system housing loan growth to slow towards 2.5% by the end of next year.
In light of this, its analysts expect bank earnings growth to slow in the coming years. It explained:
The major Australian banks have been in the midst of an EPS upgrade cycle, with 12-month forward EPS having increased by an average of 21% p.a. over the last two years. However, the outlook is now less optimistic, with 12-month forward EPS now only representing a c. 4% p.a. tailwind to share prices over the next three years.
Which ASX 200 bank shares should you buy?
The good news is that Goldman still sees value in the sector and believes a couple of ASX 200 bank shares could continue to outperform. These are Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB), with the former the broker's top pick in the sector. It added:
Despite this, the outlook for our two Buy stocks, WBC (on CL) and NAB, is better, and we highlight why we think double digit total shareholder returns remains achievable over the next three years.
Over the next three years, Goldman expects Westpac's shares to deliver an average total return of 13% per annum.
This is expected to be underpinned by the following:
- Average earnings per share growth of 5%, driven by:
- Net interest margin expansion of 8 basis points in FY 2023
- FY 2023 cost reduction of 8%
- A 7% average 12-month forward PPOP per share growth
- Partially offset by BDDs normalising +9 basis points but remaining at benign levels
- ~7% of total multiple expansion
- Average dividend yield of ~6%.
Goldman currently has a conviction buy rating and $27.60 price target on Westpac's shares.
What about NAB?
As for NAB, Goldman expects the bank's shares to provide investors with an average total return of 12% per annum over the next three years. This is based on the following:
- Average earnings per share growth of 4%, driven by:
- Net interest margin expansion of 8 basis points in FY 2023
- Strong leverage to commercial volumes
- 4% average 12-month forward PPOP per share growth
- Partially offset by BDDs normalising +13 basis points but remaining below mid-cycle levels
- ~6% of total multiple expansion
- Average dividend yield of ~5%.
Its analysts have a buy rating and $35.41 price target on NAB's shares.
