‘Weaker housing’: Morgan Stanley slashes banks’ valuations Emma...

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    ‘Weaker housing’: Morgan Stanley slashes banks’ valuations
    Emma Rapaport
    Jun 21, 2022 – 5.22pm


    Analysts at Morgan Stanley have slashed their valuations across the big four banks citing the changing outlook for interest rates and a higher probability of a recession.

    While the analysts believe a “quick and aggressive” tightening cycle from the Reserve Bank of Australia will support banks’ net interest margins, they also fear it will lead to a weaker housing and mortgage market.

    Also offsetting the margin benefit is ongoing mortgage competition, rising term deposit rates and higher wholesale funding costs.

    Analysts at Morgan Stanley have lowered their major bank price targets by an average of 15 per cent. Ryan Stuart
    As such, they’ve drastically reduced price targets for the big four banks by an average of 15 per cent and revised earnings estimates. CBA is marked down from $91.00 to $79.00, or 13 per cent, with analysts noting that Australia’s largest bank is “priced for a soft landing.” This is a scenario the analysts dispute.

    ANZ’s valuation has been slashed from $28.90 to $24.30, NAB from $31.80 to $26.60 and Westpac from $25.70 to $22.30.


    “We believe the probability of recession in Australia and New Zealand is rising,” analysts at Morgan Stanley led by Richard Wiles said.

    “In the near term, higher interest rates support the outlook for margins and earnings, but we have lowered our major bank fiscal 2024 earnings per share estimates around 7.5 per cent on average to reflect weaker loan growth and higher impairment charges.”
    Aaron Binsted, portfolio manager at Lazard Asset Management believes the second order effects of higher interest rates, namely weaker house prices and a potential credit cycle, are likely to persist and present headwinds for the big four.

    “Banks have lowered debt to income limits and mortgage rates are going up. Both reduce the amount home buyers can pay. Our banks struggle when house prices are falling,” he said.

    “On the credit side consensus is factoring in a charge of about 17 basis points. If we do have a cycle, this could easily go much higher, A simple long run average is more like 40 basis points.”

    Shares in major banks have fallen sharply since the RBA surprised with a 50 basis point cash increase in June, declining 17 per cent on average since the end of May.

    Since then, the US Federal Reserve, Bank of England and even the dovish Swiss National Bank have rushed to raise interest rates, stoking fears that central banks’ attempts to tame inflation could push economies into a downturn. The Bank of Japan is among the few holdouts, keeping rates on hold last week.

    RBA governor Philip Lowe pushed back on the idea of a 75 basis point increase in the cash rate next month in a speech delivered to the American Chamber of Commerce on Tuesday morning. He said the board would discuss the prospect of a 25 or 50 basis point increase at its next meeting, as they’d done in June.

    However, Mr Lowe confirmed that the RBA would do “what is necessary” to pull inflation back into the range of 2 to 3 per cent down from its expected peak of 7 per cent in the December quarter, describing high inflation as “damaging” and “regressive”.
 
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