banking stocks - is it that bad?

  1. 3,567 Posts.
    Extract from a ML report:

    Banking risks: Wealth management, global asset quality
    All indicators suggest a relatively robust Banking environment – volumes strong, margins mostly intact
    and credit issues (other than hotspots like US energy) benign. Unfortunately, the same can’t be said for
    Wealth Management markets, where FUM growth has contracted and (in the case of CBA) margin &
    cost ratios have been under pressure. There is little doubt that perceived issues in Wealth Management
    are continuing to influence major bank share prices – the question is whether or not it is appropriate.
    Take CBA for example: we recently downgraded the Life Insurance and Funds Management earnings
    by circa 25%, lifted bank earnings by 1-2% and yet overall group earnings only fell 2-4%. Wealth
    Management & Insurance earnings at CBA contribute more than twice as much to group
    earnings than for any other bank and, while we don’t rule out revisions to our Wealth
    Management forecasts, it’s very clear that perceived issues are more sentiment related than
    related to significant earnings risk for the likes of WBC (and to a lesser extent NAB).
    A second risk we tabled in our recent sector upgrade to ‘Neutral’ was global credit risks and, it seems
    from recent developments, that some of our concerns are increasingly omnipresent. The shares of El
    Paso, a US Natural Gas Pipeline company, have in recent days fallen more than 25% as investors
    reacted against proposals to sell core assets to meet obligations on cUS$20bn in debt. In the last year
    El Paso shares have fallen more than 90%. This is one of several exposures we believe ANZ has in its
    $9.6bn global energy book, $3.2bn of which was non-investment grade at the time of the FY02 result
    announcement. Whilst all the major banks in Australia will have some exposure to this relatively highrisk
    category, there is little doubt to us that ANZ has the greatest exposure. The default rate on sub
    investment grade debt at the moment is c10%, which would prima facie imply +$300m in prospective
    losses for ANZ. We believe ANZ’s El Paso limits north of US$100m and believe there is a further
    +US$30m on NRG (in bankruptcy protection). We calculate ANZ can run down its general provision
    by a further $400m.
    ANZ is our least preferred pick of the five major banks – credit concerns, ATO litigation on structured
    products and ongoing problems with the Qantas co-branded credit card.
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