Why today might be a good day to buy NAB and Westpac shares

The S&P/ASX 200 Index (Index:^AXJO) is poised to open weaker this morning. But the pullback might be an opportune time to buy National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC).

The broader market weakness is no thanks to weak leads from Wall Street on worries that stocks have run too far ahead of fundamentals.

But there’s value to be found in the NAB share price and Westpac share price, at least that’s according to UBS.

Last few places on the ASX to find value

The broker just upgraded these stocks to “buy” from “neutral” as the sector is one of the last few places you can find value.

It isn’t only the COVID-19 pandemic that’s been weighing on bank shares. Competition from fintechs, pressure from the banking regulator to increase their cash buffers, the fallout from the Haynes Royal Commission and tumbling interest rates are just some of the other punishing headwinds.

Shares in the big banks, excluding Commonwealth Bank of Australia (ASX: CBA), are trading at their lowest multiples in 27 years, noted UBS.

Light at the end of the tunnel

“However, with the economic outlook less bleak than anticipated even a few weeks ago,” said the broker.

“The likelihood of a further deterioration in asset quality and RWA [risk weighted asset] inflation driving additional highly dilutive capital raisings has reduced materially.

“The lower reliance on JobKeeper (wage subsidies) than government expectations also provides some flexibility for further targeted stimulus as current packages, loan deferrals and rental relief expires in October.”

Banks will recover ahead of the economy

While we the coronavirus will continue to have an impact on the economy until a vaccine is found, the broker pointed out that the market factor in the recovery before then, barring a sharp deterioration in the economy.

It’s also worth noting that the damage from the COVID-19 crisis hasn’t been as bad as what many experts (and the government) were expecting. Despite this, the government is adding to its record stimulus to get our economy back on its feet.

ASX banks could re-rate

What this means is that the threat of ballooning bad debt shouldn’t be as bad as forecast, and that will be a trigger for a re-rating in the sector.

“Although sustained low rates will weigh on NIM [net interest margin] and credit growth will be anaemic, a sector ROE of ~9% looks possible,” said UBS.

“At these levels, the banks could re-rate to around book value, and with an 80% payout ratio offer ~7.2% dividend yield.”

More reading

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• This ASX 200 stock is well placed to beat earnings expectations

Motley Fool contributor Brendon Lau owns shares of Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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