Australian Banking Sector<br/>2009 Outlook<br/>Ross Brown<br/>Research Analyst<br/>(61) 2 8258-2619<br/><a href="mailto:ross.brown@db.com">ross.brown@db.com</a><br/>Victor German<br/>Research Analyst<br/>(61) 2 8258-2378<br/><a href="mailto:victor.german@db.com">victor.german@db.com</a><br/>Prue Rydstrand<br/>Research Analyst<br/>(61) 02 8258-1788<br/><a href="mailto:prue.rydstrand@db.com">prue.rydstrand@db.com</a><br/>Deutsche Bank AG/Sydney<br/>All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local<br/>exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche<br/>Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm<br/>may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single<br/>factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research<br/>is available to customers of DBSI in the United States at no cost. Customers can access IR at<br/><a href="http://gm.db.com/IndependentResearch">http://gm.db.com/IndependentResearch</a> or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE<br/>LOCATED IN APPENDIX 1.<br/>Forecast change<br/>Top picks<br/>National Australia Bank (NAB.AX),AUD18.11 Buy<br/>Companies featured<br/>ANZ (ANZ.AX),AUD13.00 Hold<br/>2008A 2009E 2010E<br/>P/E (x) 14.8 7.5 6.4<br/>Div yield (%) 5.9 10.5 10.5<br/>Price/book (x) 1.4 0.9 0.9<br/>Commonwealth Bank (CBA.AX),AUD25.60 Sell<br/>2008A 2009E 2010E<br/>P/E (x) 14.3 9.4 8.2<br/>Div yield (%) 5.2 10.4 10.4<br/>Price/book (x) 2.2 1.3 1.3<br/>National Australia Bank (NAB.AX),AUD18.11 Buy<br/>2008A 2009E 2010E<br/>P/E (x) 13.4 7.7 6.8<br/>Div yield (%) 6.1 10.7 10.7<br/>Price/book (x) 1.3 0.9 0.9<br/>Westpac (WBC.AX),AUD15.52 Hold<br/>2008A 2009E 2010E<br/>P/E (x) 12.5 9.0 8.2<br/>Div yield (%) 5.8 9.3 9.3<br/>Price/book (x) 2.3 1.3 1.2<br/>Bendigo Bank (BEN.AX),AUD10.20 Hold<br/>2008A 2009E 2010E<br/>P/E (x) 14.5 11.5 10.5<br/>Div yield (%) 4.8 6.4 6.4<br/>Price/book (x) 0.9 0.9 0.8<br/>Bank of Queensland (BOQ.AX),AUD8.00 Sell<br/>2008A 2009E 2010E<br/>P/E (x) 16.0 7.6 7.4<br/>Div yield (%) 4.5 9.5 10.2<br/>Price/book (x) 1.4 0.7 0.7<br/>Global Markets Research Company<br/>Coping well, but too early to be positive<br/>Notwithstanding a tumultuous 18 months for banks globally, the Australian major<br/>banks continue to weather the storm better than most and were rewarded with<br/>2008 share price performance in line with the Australian market. Revenue growth<br/>remains robust courtesy of market share gains and margin expansion, trends we<br/>expect to continue in 2009. A third of FY09F term funding has already been raised,<br/>deposit growth is now running at more than twice loan growth and capital has been<br/>strengthened to levels above overseas peers. The key risk to bank earnings remains,<br/>in our view, loan losses. In recognition of further downside risks to the Australian<br/>economy, we have cut our major bank earnings forecasts by 5-10% reflecting higher<br/>loan losses in FY09-10. While most valuation metrics look attractive, we do not<br/>expect banks to outperform until the economic slowdown has peaked, hence we<br/>retain our neutral sector view with preferences for the cheaper banks (NAB and<br/>ANZ). This report changes price targets and estimates for several companies<br/>under coverage. For a detailed listing of these changes, see page 3.<br/>We prefer majors over regionals and NAB/ANZ over CBA/WBC<br/>We continue to prefer the major banks over the regionals given the much greater<br/>funding and capital challenges faced by the smaller banks (BOQ Sell, BEN Hold).<br/>Within the majors we prefer the cheaper banks using price-to-NTA, ie NAB (1.2x<br/>P/NTA, Buy) and ANZ (P/NTA 1.0x, Hold) relative to WBC (1.7x P/NTA, Hold) and<br/>CBA (1.8x P/NTA, Sell), reflecting our view that loan loss experience even after<br/>adjusting for mix and geographical differences will be broadly similar.<br/>What would a 1992 loan loss scenario look like?<br/>Our revised peak loan loss forecast for major banks is now 144bps of non-housing<br/>gross loans and equivalent to 51% of the 1992 loan loss peak of 274bps. If loan<br/>losses were to rise to 1992 peak levels (a scenario we still consider unlikely) on<br/>our estimates earnings would be cut by 40-50%, but major banks would remain<br/>profitable ($1.7-2.7bn cash NPAT range for major banks). In this worst-case<br/>scenario if dividend was cut to ensure payout levels consist with FY07, the yield<br/>would still be ~4% - in our view not a bad outcome for what would be a “trough”<br/>year and a further $5bn of capital would need to be raised by the majors to keep<br/>capital ratios constant. In the context of the $14bn raised by the majors in 2008,<br/>this does not look a stretch.<br/>Neutral sector view<br/>We are neutral on the bank sector, reflecting our view on valuation and risks from<br/>a greater than expected economic slow down. The sector’s forward PE is now<br/>30% below the long-term average, the price-to-NTA of 1.4x is also ~40% below<br/>the average, however the PE relative to All Industrials (ex banks) is ~5% above the<br/>average. We use a combination of sum of the parts, DCF, P/Book and PE-based<br/>methodologies for valuing banks. Main upside and downside risks relate to the<br/>extent to which loan loss experience is greater or lower than our forecasts (see<br/>pages 3 and 26-37 for further details).<p>Table of Contents<br/>Earnings/price target changes ......................................................... 3<br/>What if 1992 losses repeat? .............................................................. 4<br/>Peak to trough earnings recovery 3-7 years..............................................................................4<br/>Increased efficiency means banks less sensitive to bad debts.................................................4<br/>Earnings reduced by ~40-50% if apply 1992 peak loan losses.................................................4<br/>What would happen to capital and dividends?..........................................................................5<br/>Value emerging.................................................................................. 6<br/>Australian banks have performed in line with market ...............................................................6<br/>Australian banks continue to be very profitable ........................................................................6<br/>Current valuations capture further 17-26% downside risk ........................................................7<br/>Absolute PE looks cheap but PE relative suggests only fair value ............................................7<br/>Book value/NTA metrics suggests banks are good value .........................................................8<br/>Funding getting better .................................................................... 10<br/>Term funding raisings for FY09 on track .................................................................................10<br/>Deposits growing much faster than credit growth .................................................................11<br/>Interest margins expanding............................................................ 12<br/>Major banks reporting margin expansion................................................................................12<br/>Credit growth – not all bad............................................................. 13<br/>Credit growth slowing but major banks gaining share............................................................13<br/>Non-banks ceding significant market share to major banks....................................................14<br/>Foreign banks also in retreat ...................................................................................................15<br/>Bad debts still the key risk.............................................................. 16<br/>Bad debt forecasts revised up, consistent with GDP expectations ........................................16<br/>Is Australia different? ..............................................................................................................17<br/>Are major bank collective provisions adequate? .....................................................................18<br/>Corporate loan losses greater risk than home lending............................................................19<br/>Capital position strong.................................................................... 21<br/>Do dividends need to be cut? .................................................................................................22<br/>Capital sensitivities from pro-cyclical growth in RWA.............................................................22<br/>Appendix A....................................................................................... 24</p><p></p><p>
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