**28/10/10 - 8.14am - by James Gerrish**
There was an article yesterday in the Wall Street Journal that suggested the Fed Reserve was going to be more conservative with the much anticipated QE2 program than perhaps the market has priced in. This was enough to send Material stocks lower into the close yesterday and cause some concern about in overseas markets. The USD found some buying support, commodities across the board were lower particularly the energy space which lost 1.12%.
The DOW JONES lost -43 points or -0.39% to close at 11126. In London the FTSE 100 fell -61 points or -1.07%. Locally, SPI FUTURES are actually pricing in a rise of 13 points this morning and this may be driven once again by a rotation out the resource stocks into the banks.
ANZ reported this morning posting a record profit of $5.133 billion for fiscal 2010. This represented a 51.7% YoY increase and beat consensus estimates by $200 million. The dividend came in well ahead of expectations at 74 cents (market expecting 68c) which takes the full year amount to $1.26 - a 24% increase in the dividend from last year. To me this looks like a great result and should be supported by the market today.
Mike Smith also reiterated that ANZ was on track to generate 20% of its net income from Asia Pacific operations which is one of the main reasons I've retained ANZ as my number one pick in the sector.
Early this week I sent out a note to client outlining my view on the banks. Its worth reiterating today given release of the ANZ result.
Written 25/10/10
Banking stocks on the local market found their feet today after almost a month of underperformance. If we take a look at a chart of the financial sector v the S&P/ASX 200 the recent theme is quite obvious.
A number of factors have contributed to this theme including:
• The threat of a property bubble (I totally disagree with this as there are fundamental reasons for a buoyant property market in most capital cities)
• The attraction of resource stocks based on surging commodity prices (underpinned by US dollar weakness)
• Heightened uncertainty about financial companies in the US and Europe – filters through to sentiment here
Today we saw a rebound in the sector which gives us a good reason to review our favoured picks
The banks we’ll look at here are Westpac and ANZ. CBA has been omitted as it is does not have a dividend coming up in the next month. NAB has been omitted as I disagree with its focus of growing operations in Europe and prefer to avoid if from an investment perspective.
ANZ (ANZ) – remains my number 1 pick within the sector and has been quite resilient over the past month. ANZ reports full year results on Thursday with a dividend due on the 5th November. ANZ announced today that it had been granted approval by the Reserve Bank of India (RBI) for a foreign banking licence. The banking licence will help ANZ to grow in India and towards the goal of becoming a super regional bank in the Asia Pacific. A strategy that I firmly believe will offer ANZ a unique advantage over the three other major institutions. Full Research Report on ANZ attached. Recommendation: BUY
Westpac (WBC) – from a valuation matrix, Westpac now takes the crown of being the cheapest of the big four! This is based on price to earnings and price to book ratios. Westpac generally trades at a premium to both ANZ and NAB however at the moment we’re seeing the stock trade at a discount to historical multiples. This gives us a good reason for further analysis. Another positive is the Fully Franked 5.8% yield with a dividend due early November. Full research report on WBC attached. Recommendation: BUY
Conclusion – For those longer term investors without exposure to WBC or ANZ, I believe its worth starting to accumulate a holding in each stock to pick up the dividends in November and potential for upside in the coming months.
In local economic news, Consumer Price Index (CPI) data was released yesterday and it came in below expectations of 0.7% quarter on quarter (q/q) with the YoY rate slowing to 2.8%. This brings inflation well back into RBA target band and the market is now pricing in NO ACTION by the RBA in November and little chance for another rate rise this year.
