Solid bank earnings do not justify price tag: Morningstar
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The news: Morningstar expects Australia's banks to benefit from sector-wide net interest margin (NIM) improvements, but flagged that value is "scarce" among the banking majors.
The context: Morningstar analyst Lochlan Halloway noted that the pricing among the big four lenders is becoming more rational, with NIM "broadly stabilising" in the second half of FY24. Halloway expects modest NIM improvement over the medium term, driven by more favourable deposit pricing and higher returns on deposit and capital hedges.
While this is a positive, he said, NIM is is unlikely to return to pre-Covid levels during Morningstar's five-year forecast period.
Elsewhere, Halloway said that banks' operating cost growth was "less impressive" in FY24, with progress since the pandemic becoming "unstuck". The cost-to-income ratio among the big four lifted roughly two percentage points compared to the previous year, partly due to wage inflation and technology costs.
However, the average major bank cost-to-income ratio should fall around 2.5 percentage points over the next three financial years, the analyst said.
Overall, Halloway flagged that value is "scarce" among the major banks, but said ANZ and Bank of Queensland are Morningstar's top picks in the sector. ANZ is the only one of the big four trading close to fair value, he said, while NIM improvement is driving medium-term earnings recovery at BOQ.
While Commonwealth Bank remains the most overvalued, its lower cost of funding and better operating efficiency warrants its premium, Halloway noted.
The source: Morningstar
