Goldman Sachs, UBS, Deutsche Bank on the big four banks

ANZ's result was broadly in line with expectations, and not as weak as feared. Revenue growth was subdued. Despite 2.3 per cent growth in revenue per share, this was almost entirely a result of foreign exchange gains. Higher bad and doubtful debts also detracted from growth.

Deutsche Bank "buy"

While ANZ's delivery of its strategy has been patchy in recent periods, we saw encouraging signs in the first half of 2015 given:

• We estimate underlying earnings growth ex one-offs and foreign exchange was a relatively healthy 2.5 per cent (versus Westpac at 1.6 per cent);
• Higher quality customer sales income in global markets rose 9 per cent on previous calendar period;
• Return on risk-weighted assets in International and institutional banking Asia continued to rise (up 4 basis points on previous calendar period);
• The home markets were relatively strong.

CBA

UBS "neutral"

CBA provided a soft trading update for the third quarter of 2015 (to March). Although revenue growth was above peers, underlying trends were weak. Net interest margin pressure is building, particularly in mortgages, while revenue continues to be supported by trading income. Costs rose sharply with regulatory costs called out. Jaws [a ratio which compares income growth to expenses growth] were negative.

Goldman Sachs "sell"

[There is upside in] stronger-than-peer margin performance given funding flexibility, leverage to recovering equity markets, leveraging technology advantage.

Deutsche Bank "hold"

CBA's third-quarter update was disappointing, with cash earnings around 5 per cent below the quarterly average of the first half of 2015 on higher costs. While some of the costs are likely one-off in nature (eg, customer remediation), the bulk appear recurring and this has driven downgrades to outer-year forecasts of almost 3 per cent. Repricing action by CBA shows it is willing to take steps to offset margin pressure, however the benefit looks small at this stage. While recent heavy share price falls have seen better value emerge in the sector, we remain on a hold on CBA.

NAB

UBS "neutral"

We believe NAB made the difficult but correct decision to announce a UK demerge/IPO (despite the required £1.7 billion [$A3.4 billion] provision for conduct) and strengthen its balance sheet. Since Andrew Thorburn has taken over as CEO in August 2014, he has restructured his executive team, written down and reprovisioned the book, announced an exit path from the UK and raised equity. The market has rewarded NAB, being the best-performing major [in the] year to date. However, NAB is no longer cheap.

Goldman Sachs "neutral"

[There is ] upside [in] accelerated recovery in domestic business banking franchise, recovery in business lending. [There is] downside [in] failure to successfully execute on various capital initiatives announced at the first-half 2015 result, deterioration in asset quality.

Deutsche Bank "hold"

While it is encouraging to see NAB de-risking its business by exiting the UK and significantly bolstering its capital position, the steps taken appear to have delivered limited valuation upside, with much of the benefit of the UK demerger eaten away by the £1.7 billion capital charge for conduct risk. We agree that the core franchise should re-rate.

Westpac

UBS "buy"

While the recent Westpac result was softer than anticipated, it has seen a significant share price pull-back. Over the last month it has delivered -13 per cent total return, underperforming its peers by 5 per cent and the market by 10 per cent. We see Westpac as a strong franchise with sector-leading asset quality and strong capital generation. With a PE of 13.0x, 1.9x book and a dividend yield of 5.9 per cent. we have upgraded Westpac to "buy".

Goldman Sachs "neutral"

[There is] upside] [in] better expense control, stronger margin, better volume performance. [There is] downside [in] continued margin pressure, asset quality deterioration.

Deutsche Bank "buy"

We view the 17 per cent fall in Westpac's share price over the last six weeks as unjustified given strong fundamentals, a first-half 2015 result only marginally weaker than expected (ex one-offs), and three-year forecast growth which we expect will exceed domestic-focused major bank peers. While Westpac is more exposed than most to regulatory concerns, these look manageable and, over time, we expect asset/liability repricing will largely protect return on equity.