The Big Four banks were arguably the least popular stocks during the Banking Royal Commission, with all four share prices plummeting – but they’ve since recovered strongly, according to UBS Bank.
In a note this morning, UBS analyst Jonathan Mott said the economic outlook was looking less bleak than anticipated a few weeks ago, although there were still significant headwinds ahead.
“We do not believe we are out of the woods from an economic or health perspective, especially if a vaccine rollout is delayed,” said Mott.
“However, we believe the market is likely to factor in a recovery in bank returns unless we see further economic deterioration.”
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UBS has upgraded its rating on NAB and Westpac to ‘buy’, marking a growing confidence in the two big banks. ANZ has already been considered a ‘buy’ by the Swiss bank, while it holds out on the Commonwealth Bank.
“Order of preference in the Majors: ANZ, WBC, NAB, CBA,” said Mott. “While we believe CBA justifies a premium given its higher returns and franchise strength, we believe there is more upside in its peers at this stage of the cycle.”
The ratings upgrade comes after months of UBS revising down the earning forecasts of the banks.
But a string of positive economic data over the last few weeks has buoyed confidence and reduced pressure on the big banks, Mott said, resulting in the upgraded rating.
“On balance we believe the banks look relatively attractive especially given the low returns and expensive valuations in other asset classes and other parts of the market,” said Mott.
“Bank returns are likely to have improved and dividend payout ratios are likely to recover.”
Motley Fool Australia chief investment officer Scott Phillips said share prices have already begun to recover, though the ASX is still 17 per cent below its February highs.
“Investors are trying to work out how much less pessimistic they should be, and which companies' share prices remain unfairly in the doldrums,” he told Yahoo Finance.
“Banks were priced, at one point, for calamity – huge amounts of bad debts, falling margins (thanks to falling interest rates), and a big question mark on how long it'd be until growth returns.
“Plus, of course, dividends were cut and deferred and there was a possibility – even if very unlikely – that banks might need government bailouts in a worst-case scenario.
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Phillips said these risks are now “either completely gone”, “less likely” or “meaningfully reduced,”.
“I think it's likely that the long-term investor makes money buying bank shares today,” he said.
“But I also think it's likely that bank shares will underperform the market, over the medium term (and probably the long term), given their constrained growth potential (they don't have much market share left to gobble up, and the economy isn't exactly going to put a fire under house prices or lending growth).”