Contents
Executive summary 3
The single largest contributor to earnings growth in a recovery is provision
utilisation, which we estimate at about A$3bn per bank. In combination with more
optimistic credit-growth assumptions, we upgrade earnings by up to 30% and favour
NAB and ANZ. 3
The ABC of recovery – U, V or W? 8
Through the use of some unconventional measures, the global economy appears to
have stabilised. However the presence of banking crises in the US and UK mean
that any global recovery is likely to be U rather than V shaped. 8
Global economy – stabilised through extreme measures 8
Global economy – Armageddon averted, however wounds to heal slowly 12
V- rather than a U-shaped recovery? 14
Post-crisis banking environment 18
FY11 is likely to be different for the banks in a number of ways. The competitive
landscape is likely to be favourable, though the banks will have to contend with
greater regulation while managing the inevitable structural change that comes with
global deleveraging. 18
Regulation – more and broader ranging, despite the majors avoiding most of the pain 18
Competitive landscape – strong position, but not all changes are structural 27
Macro imbalances – need to be addressed – lower growth profile 29
Deleveraging – likely to continue 30
FY11+ earnings implications 32
Our scenario analysis shows that FY11 EPS could range from -17% to +55%
around trough-cycle EPS. Similarly, system ROEs could be between 12-20%. This
shows the possibility of both upside and downside relative to the low volatility precrisis
environment. 32
Economic backdrop – what would a U, V or W recovery look like? 32
Regulation – what are the possible outcomes? 42
Competitive landscape – back to normal? 45
Macro imbalances – is international wholesale funding going to become scarce? 48
Deleveraging – debt hangover could see below-trend asset growth 49
Sensitivity – FY11 could look reasonable or ugly depending on the scenario 50
Please release me! 54
We expect lower provisions to contribute up to 30% of earnings in a recovery. In
this regard, the use of pre-provision profit metrics provide greater optics in terms of
potential share price upside. This has led to our significant target price upgrades. 54
Provision utilisation – the main factor 54
Recovery valuations – PE, PB, PNTA, or something else? 60
Investment view – NAB and ANZ our preferred recovery plays 66
Company specifics 67
ANZ Banking Group – Buy, A$25.93 TP 67
Commonwealth Bank of Australia – Hold, A$51.45 TP 72
National Australia Bank – Buy, A$34.64 TP 76
Westpac Banking Corporation – Hold, A$26.42 TP 80
Appendix 82