ASX bank shares have had a remarkable run since November, and now it's time to be cautious on the sector, warns top broker Goldman Sachs.
In a note to clients, the broker said bank fundamentals were generally weak and stocks were trading at "close to record expensive" levels.
Goldman said:
… while the deterioration in earnings appears to now be finished, we see very limited upside risk, and therefore, with valuations skewed asymmetrically to the downside, we now think a more negative view on the banks is appropriate …
The broker added:
Australian bank valuations are at extremes, with absolute 12-month forward PERs at the 99th percentile, our DCF valuations are, on average, 175% below current share prices, and the spread between bank fully-franked yields and the 10-year bond yield is currently at its lowest level in nearly 15 years.
Amid stretched valuations, Goldman has a buy rating on only one bank among the big four institutions.
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Which bank is a buy?
Goldman has a buy rating on ANZ Group Holdings Ltd (ASX: ANZ) with a 12-month share price target of $28.15.
ANZ shares closed on Friday at $28.25, up 1.15% for the day and up 8.7% in the year to date.
Goldman analysts Andrew Lyons and John Li said:
We are Buy-rated on ANZ given i) we are seeing evidence of ANZ's ability to derive productivity benefits (A$201 mn in 1H24) and management noted there remains a large pipeline available which can be used to offset cost inflation.
Furthermore, ii) the improving profitability of ANZ's Institutional business remains a key driver of our positive investment thesis.
We continue to see upside for Group returns due to accretive mix shifts in the Institutional business towards higher ROE Payments and Cash Management business.
Finally, the stock still trades at a discount to the sector (ex-dividend adjusted).
Why is this ASX 200 bank share a sell?
Goldman has a sell rating on ASX bank share Westpac Banking Corp (ASX: WBC) with a 12-month price target of $24.10.
Westpac shares closed yesterday at $25.98, up just 0.19% for the day and 12.56% higher year to date.
Lyons and Li said they had downgraded Westpac shares due to the following factors:
… i) execution, cost and timing risks relating to its technology simplification, ii) of the major banks, WBC's balance sheet is the most overweight domestic housing, which we expect will be more growth constrained than commercial lending over the medium term, iii) NIM has been supported by a shorter duration replicating portfolio but this will give them less longevity, and d) WBC's 14.2x 12-mo fwd PER is more than one standard deviation expensive vs. its 12.7x historic average.
