Some factors that led to the global rally in banks stocks may not lift the shares of Commonwealth Bank and its key competitors, according to Morgan Stanley.
The investment brokers argue the lenders are already overpriced and sees potential for share price falls in their latest analysis.
Morgan Stanley’s warning is in line with other brokers including Macquarie, which cut its rating on the sector to neutral from outperform and Citi, , which reduced its view on three of the four largest banks.
A short time ago, the big four banks are flat, with Westpac at $31.80, ANZ, $29.43; NAB, $30.17; and the CBA, $81.77. The four lenders have risen between 6% to 26% in the past year.
Here are the reasons why Morgan Stanley is circumspect on Australian lenders:
1. Monetary policy and margin expansion: A possibility of tighter monetary policy in the US, Europe, and Japan underpin the potential for material net margin expansion for many global banks. However, Australian banks are unlikely to benefit nearly as much given their reliance on credit markets for funding and and a less hawkish outlook for higher RBA cash rates.
2. Reduced regulation, excess capital and dividends: Recent developments pointing to an easing of global banking regulation have increased investor confidence in banks’ capital adequacy and dividend growth. In contrast, the Australian regulator has stated that “capital accumulation remains the appropriate course”. That when , three of the major Australian banks accept their dividend payout ratios are above target.
3.Lower US taxes: Morgan Stanley forecast median earnings per share for large US banks to climb 10% from potential tax changes. In Australia, however, they differ as the government’s proposed reduction of the large company tax rate looks unlikely to get through Parliament.
4. Valuation support: Australian bank are expensive compared to long-term average and the outlook for return on equity, earnings per share growth and dividend growth is “less attractive” than it was in the past. On the othe rhand, the analysts see potential for share price gains for global banks
5. Fiscal stimulus and improving economic outlook: While economic growth forecast for developed economies have been raised and economic data in the economies have surprised, Morgan Stanley sees below-consensus growth of 2% in 2017 for Australia and this can eat into credit growth and profits of the banks.