Morgan Stanley upgrades NAB and Westpac
Make us a preferred source
Make us a preferred source on Google
The news: Morgan Stanley upgraded its rating on National Australia Bank and Westpac, and hiked its target prices on Australia's major lenders, due to better-than-expected operating trends and willingness by investors to pay higher multiples for their strong balance sheets and 'safe haven' status.
The numbers: Morgan Stanley upgraded NAB from 'equal-weight' to 'overweight' and raised its price target from $34.20 to $38. It also upgraded Westpac from 'underweight' to 'equal-weight' and lifted its price target from $26.50 to $29.70.
Elsewhere, Morgan Stanley hiked its price target on Commonwealth Bank from $103 to $113.50, and on Bendigo and Adelaide Bank from $11.90 to $12.
NAB (0.9%) and Westpac (0.4%) were both trading higher by 12:25pm AEST. CBA and Bendigo were flat, while ANZ lost 0.4%.
The context: Morgan Stanley analysts noted that NAB is their preferred major bank, followed by Westpac, then ANZ, then CBA.
NAB, they said, had a clear strategy, has a strong performing business banking franchise, good cost discipline, above-average provision coverage, scope of further buybacks and ongoing dividend growth, and an improving return on equity.
They said that "a lot has gone right for the banks in 2024", with investors drawn by easing competition and margin stability, the prospect of RBA rate cuts, strong business loan growth, signs of better mortgage growth, very low loan losses with large provision buffers, excess capital with accelerated buybacks, and higher dividends.
There is also upside risk for a stronger-than-expected economic rebound in 2025, they said, as well as renewed use of oligopoly pricing power, and accelerated capital management initiatives, alongside an ongoing investor preference for exposure to domestic rather than global businesses.
However, the analysts flagged key downside risks of a step up in deposit and mortgage competition, weaker economic and credit quality outcomes from higher-for-longer rates, a shock in global credit markets, and unanticipated regulatory or political developments in an election year.
What they said: "In our view, it's hard to justify current prices based on the banks' growth and return profile, but investors have been willing to pay more for their lower risk profile and stronger balance sheets, and their 'safe haven' status within the Australian market," the analysts said.
"We believe share prices imply that nothing goes wrong in 2025," they noted.
"Current trading multiples and earnings estimates already capture the potential benefits of rate cuts, a strong economic rebound, a benign competitive environment, a low risk profile and active capital management."
The source: Morgan Stanley research
