The S&P/ASX 200 Index (ASX: XJO) bank shares have been outperforming the index in the last few months. Is it a good time to buy or not?
In the last six months, the Commonwealth Bank of Australia (ASX: CBA) share price has risen by 17%, the Westpac Banking Corp (ASX: WBC) share price is up 27%, the ANZ Group Holdings Ltd (ASX: ANZ) share price is up 17% and the National Australia Bank Ltd (ASX: NAB) share price has climbed by 18%. The ASX 200 is up by just 7% in the last six months, as a comparison.
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Are ASX 200 bank shares good value?
In a note to clients, UBS analyst John Storey and associate analyst Olivia Clemson said "very optimistic assumptions are required to justify the recent run-up in bank share prices".
UBS suggested the rally is due to the market expecting a soft-landing scenario for the economy, and the possibility of "lessening competitive pressures" in deposits and lending.
The share strategy team at UBS is underweight on banks, which means the broker thinks the sector is unattractive at the moment and is "cautious."
Having said that, after looking at the recent half-year results and FY24 first-quarter trading updates – different banks have different reporting schedules – UBS decided to increase its adjusted earnings per share (EPS) estimates by 1%, 3% and 2% on average for the financial years between FY24 to FY26.
UBS also said it had increased its price targets by around 14%, on average.
What could happen with earnings?
The broker points out that market consensus expects Australian bank profits to fall 8% in FY24 and 3% in FY25.
The UBS analysts said:
Australian Banks are defensive, while capital return is an underpin to the investment case, but subsequent returns at these PE multiples have proven to be below market (longer term).
Storey acknowledged revenue has been boosted by stronger-than-expected non-net interest income. The analyst said positive earnings per share (EPS) surprises over time could occur if there's stronger-than-expected volume growth.
New price targets for ASX 200 bank shares
A price target tells us where the broker is guessing the share price will be in 12 months. These are the UBS price targets for the banking industry:
- ANZ's price target is $30
- Macquarie Group Ltd's (ASX: MQG) price target is $185
- CBA's price target is $105
- Westpac's price target is $23
- Bank of Queensland Ltd's (ASX: BOQ) price target is $5
- NAB's price target is $28
- Bendigo and Adelaide Bank Ltd's (ASX: BEN) price target is $8
ANZ's price target is the only one implying a possible rise, with many of the targets suggesting double-digit declines. If those targets become a reality, it may mean it could be wise to wait.
