Analysts Cautiously Suggest The Worst May Be Over For Australian Banking Stocks

Post by Sharat on March 24, 2009 · Under Australian Economy, Business News, Capital Markets, Equities, Mergers & Acquistions, banking · Comment

An extremely tentative view is starting to emerge that the worst of the global banking could be over, after global financial markets across all asset classes went into a tizzy in the aftermath of the failure of Lehman Brothers.Analysts are suggesting that Australia’s Big Four could emerge from the crisis in a far stronger position than they entered the crisis with.

The banking crisis has forced weaker financial institutions in Australia to seek merger partners or even outright buyers, which have been largely if not exclusively comprised of the big four Australian banks. This has meant there is less competition and larger market shares for the big four, particularly in specific areas such as mortgage lending and SME lending. All of which has resulted in fatter margins, increased pricing power.

The view has seemed to have taken hold of Australian investors and could be one explanation why the big four banking stocks outperformed the broader equity market last week. Australian banking stocks began their march upwards last week in spite of CBA chief Ralph Norris making statements to the effect that he believed the “worst is yet to come”

Shares in Mr. Norris’s own bank climbed 12 per cent last week.

The focus of the crisis over the last few weeks has shifted to Eastern Europe, where mortgage holders in the part of the world took speculative home loans in foreign currencies and have seen the cost of servicing the debt multiply as domestic currencies collapsed against all major global currencies.

CBA’s Norris in particular specified that loans for infrastructure projects and privatization programs could be the next Achilles heel for global finance.

“Now we’re seeing the collapse of (the region’s) currencies. This has led to a huge amount of debt in local currencies that has not been hedged, and this is obviously going to come back and haunt the banks that have lent money to these sorts of countries. I think this is going to be the next phase of the crisis.” Mr. Norris said last week.

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Citigroup lifted its earnings forecasts for the Big Four in a detailed report on Monday, citing the federal Government’s wholesale funding guarantee, improving interest margins and “bland” balance sheets with minimal exposure to structured credit.

“As a result of this, we would also call them beautiful — in the sense that their profitability is likely to improve sharply as the economy recovers, yet their valuations are increasingly attractive,” Citi said.

Despite the upgrade, Citi said it was not yet the time to buy the Big Four, as they were fully priced after last week’s rally.

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Tags: Australian Banking, banking, Banking Equities, Commonwealth Bank, Equities, home loans, Investing, Mergers & Acquisitions, Shares

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Analysts Cautiously Suggest The Worst May Be Over For Australian Banking Stocks

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