It has been a busy period for the banking sector, with ANZ Group Holdings Ltd (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), and Westpac Banking Corp (ASX: WBC) all releasing their latest updates this month.
The market reaction to the results has been overwhelmingly positive, with CBA and the other big four banks seeing their shares charge higher (before some traded ex-dividend).
Let's now see what analysts at Wilsons are saying about the banks after it ran the rule over their results and outlooks.
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What is Wilsons saying about ANZ, CBA, NAB, and Westpac shares?
Unfortunately, the broker hasn't seen anything in the results that changes its view of the banks. It revealed that its "sector view remains unchanged with the Focus Portfolio retaining an underweight exposure to sector."
Wilsons acknowledges that the "banks reported sound results for 1H24, which were generally a touch ahead of consensus expectations across key line items." However, this doesn't hide the fact that "the sector's medium-term earnings outlook still remains challenged."
It also feels that CBA shares (and the rest of the big four) look overvalued based on current multiples and this challenging outlook. The broker said:
Following modest forward upgrades, consensus forecasts still point to negative EPS growth for the ASX 200 Banks Index in both FY24e and FY25e. In this context, the sector's valuation premium relative to history remains excessive and unjustified at the headline level, albeit with pockets of relative value within the sector.
What else did the broker say?
Wilsons notes that the banks are returning capital with share buybacks. However, it has described this as a "temporary sugar hit." It also believes it "fails to address the still lacklustre medium and long-term EPS growth outlook facing the sector."
The broker then summarises its view on CBA and the other banks' shares. It said:
In the context of a weak earnings growth outlook, on the whole bank valuations remain highly uncompelling. The ASX 200 Banks Index trades on a forward PE multiple of 16x (skewed by CBA where we have zero weight), representing a ~13% premium to the 5-year average, and a forward price to book (PB) ratio of 1.6x, which is 14% above the 5-year average.
The current sector valuation (forward PE of 16x) implies the market is pricing in ~20% EPS growth in FY25 (if we assume a mean reversion to the 10-year avg PE of ~13x occurs) , compared to consensus of -1%. This is highly unlikely to eventuate in our view without a dramatic shift in RBA policy rate expectations and the economic outlook, demonstrating the extent of the sector's current valuation excesses at current levels.
