We are quite bullish on the prospects for BEN. Below is an extract from our client research this week revealing our view on the fundamental side as well as the technical.
INVESTMENT VIEW
Notwithstanding that underlying earnings growth over the short-term is likely to be hindered by slower asset growth; NIM pressure as a result of competition; falling Homesafe revenues; and higher costs driven by rising capitalised software balances, we highlight the potential for underlying earnings in the short term to benefit from i) Bad debts continuing to remain low in the short term. In particular, residential loan arrears of >90 days were flat in 1H15 and very low at 56 basis points and ii) Pricing pressure to ease as a result of improved credit growth and a slowdown in the rate of customers paying down debt.
We are taking a POSITIVE longer-term view on BEN, given that advanced accreditation is expected to improve capital generation over the medium-to-longer term and place the Bank in a better position to pursue acquisitions. As well, the investments in technology that BEN is undertaking should allow the Bank to improve its already market-leading customer satisfaction levels, and potentially, allow BEN to leverage off a lower cost base (as investment in technology tapers off and additional staff costs (mainly as a result of the RFC acquisition) stabilise.
Further, we highlight that BEN has a 1-year forward yield of 5.3%, which is above the average for the yield for the major banks. We note that this is despite BEN reducing its dividend payout ratio from >70% in the prior corresponding period to 66% in 1H15, as regional banks improve capital levels following the regulatory reviews. (BEN”S target payout ratio is 60-80%).
CHART VIEW
Unlike the big 4 banks (ex CBA), BEN continued to trend higher throughout 2014. The recent selloff looks dramatic on a smaller time scale but on a longer timeframe, we can see that the uptrend is still well and truly intact. There is a possibility of a dip back towards $12.50 again but clearly the downside is limited. Where most of the other banks are looking very overbought as measured by the momentum indicators, BEN has just moved out of being oversold so is likely to outperform the other banks over the next few months as it finds support and continues to grind higher.
