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The Banks - why the strong banking sector

  1. Henrik

    635 Posts.

    If US sneezes, our bank chiefs are laughing
    By Mark Westfield
    June 12, 2002

    FEARS of a double-dip recession in the US and the market's trashing of three of Australia's leading stocks is putting a grin on the faces of the country's bankers.

    ANZ, Commonwealth, National Australia, St George and Westpac shares moved to record or near-record levels this week on the back of some complex warrant plays – as the shares go ex-dividend – and an investor retreat from so-called growth and cyclical stocks. The money isn't standing still. It's moving aggressively into defensives.

    To the logical and rather more prosaic reasons for the flow of funds can be added an element of speculation ahead of possible corporate activity.

    Potential targets ANZ and St George Bank have been the sharpest risers, with ANZ jumping 49c yesterday to a new record of $20.38 and the Dragon adding another 44c also to a new high of $20.45.

    Although none of its potential suitors, NAB, ANZ or Suncorp Metway, can contemplate a move before July 1, when its restrictive articles of association expire, they are unlikely to be as eager as this, preferring to wait for some bad news that would pull the share price downwards. At these prices, St George is a bit rich for a buyer.

    "I wouldn't be waiting on July 2 for an announcement of a deal," was Deutsche Bank analyst Ross Brown's tip yesterday.

    AMP remains in a sub-$17 trough, and its shareholders must be sorely regretting the decision of its former chairman in late 1999 to reject an offer of $21.50 from the NAB.

    The next offer will be treated much more seriously. The bank mooted to make the next offer, Westpac, will have done its homework on its quarry more thoroughly too. Bank boss David Morgan was coy when AMP's name was mentioned to him yesterday, but he can hardly rule it in or out at this stage.

    Star performers of the late 1990s growth era, News Cor poration (publisher of The Australian), Telstra and AMP cannot continue to promise the strong incremental earnings and revenue increases to which the market had become accustomed, nor can they hope to deliver the heavy dividend fully franked streams of defensives like the banks.

    Telstra is struggling to hold its ground as a growth stock, but the market won't accept the story and wants it to be a yield investment, again like the banks.

    AMP is unloved because the investment markets where it makes most of its money are riddled with doubts and falling. Management isn't giving shareholders much hope of finding a solution to the insurer's slump either.

    As a result, investors are saying goodbye and moving to high-yielding safe havens. Even the prospect of further interest rate increases isn't discouraging investors.

    The banks will take another rise or two yet before their generally ungeared corporate customers get into trouble. Retail borrowers may show signs of distress earlier – with household debt running at 110 per cent of income. But with most of this borrowing in the form of home mortgages, these clients will take a lot of pain before handing the keys over to their friendly branch manager.

    Frank Cicutto at NAB and David Murray at Commbank will be delighted with their new-found market popularity. If there is to be a shake-out and the possibility of four pillars shrinking to three, or even going altogether, they'll want their invasion curency to be as high-priced as possible.

    St George will be expensive for any buyer, even NAB.

    Having been frustrated for a year or more in the UK, Cicutto's patience will be tested to the extreme by knowing that if he doesn't start talking to Gail Kelly at St George, perhaps John McFarlane at ANZ will.

    The big test for four pillars would come next. Murray has more form as an acquirer than any of the current crop of bank chiefs. With Colonial almost bedded, and with his stock find ing new highs (up 66c to $34.71 yesterday) he has the currency to buy any bank or institution he wants – bar NAB (it's too big) and Westpac( because he'd have Allan Fels to reckon with).

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