Australia's banks have been solid earners in terms of share price appreciation and dividends in recent years. However, research released by Jarden recently shows their valuations are trading above expectations, with share prices that "continue to trump fundamental arithmetic."
Those valuations could become even more stretched with the banks' net interest margins (NIM) coming under further pressure from the 25-basis-point cut to official interest rates announced today, August 12.
There is one standout, however. Just one of the six bank stocks Jarden covers looks like a strong buy at the moment.
You can almost rule out the big four banks. Jarden has Commonwealth Bank of Australia (ASX: CBA) rated a sell, National Australia Bank Limited (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) rated "underweight," and only ANZ Group Holdings (ASX: ANZ) among the big four rated as "overweight."
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Which of the smaller ASX banks is worth a look?
However, there is potentially good buying among the smaller ASX challenger banks, with Jarden rating Bendigo and Adelaide Bank Limited (ASX: BEN) as "neutral." At the same time, it rates Judo Capital Holdings Limited (ASX: JDO) a "buy" with a 12-month price target of $2.40 compared with the current share price of $1.65.
"The June 3 investor day reaffirmed guidance and hence we don't expect any negative surprises,'' Jarden analysts said in a recent note to clients.
"We see Judo in good shape for operational leverage.''
Investors could look to make around 50 per cent gains should that target price be achieved.
Elsewhere, Jarden is tipping share price declines over the next 12 months across all the major banks, with a 12-month price target of just $110 for Commonwealth Bank, compared with a trading price of $179.76 at the time of writing on Tuesday.
At those prices, the heavily bought CBA was trading at a price-to-earnings (P/E) ratio of around double that of its peers, NAB and Westpac. It came in at about 30 times earnings, with Jarden expecting no surprises when CBA reports on August 13.
"Expect a routinely uneventful result, modest core profit growth of 0.7 per cent half on half in line system growth and reasonable non-interest income offset by … net interest margin compression and continued sensible franchise investment,'' Jarden analysts said of CBA.
"Challenge is valuation given stock inelasticity, exacerbated by non-fundamental flows.''
No big surprises tipped
Across the banking sector, Jarden is not expecting any outliers.
"Non-fundamental flows and Your Future Your Super herding impacts continue to trump fundamental arithmetic,'' Jarden analysts said.
"Results unlikely to materially shock on positive or negative. Share price reactions might be more driven by results in other sectors (rotation).
"Net interest margin prints may surprise as pricing, volume, trading, hedging and positioning collide with reality. Regardless, rate cuts are negative for NIM.''
CBA is scheduled to report on August 13, Judo on August 19 and Bendigo and Adelaide Bank on August 25.
