Goldman ‘remains confident in the health’ of ASX 200 bank shares and names it top pick

The Australian banking sector has been under the pump recently amid concerns over a global banking crisis.

This has seen ASX 200 bank shares such as Commonwealth Bank of Australia (ASX: CBA) pullback meaningfully from recent highs.

Is it time to panic?

The team at Goldman Sachs has been looking at ASX 200 bank shares and remains confident that they are in good health.

The broker highlights that the big four banks have liquidity coverage ratios (LCR) well ahead of requirements and strong capital positions. It commented:

Post Silicon Valley Bank being taken into receivership by the FDIC, we have received an increasing number of queries regarding the resilience of the Australian Banks. We remain confident in the health of the banking sector in Australia given: i) a single, national regulator, with most of the Australian listed banks subject to the Liquidity Coverage Ratio (LCR), ii) balance sheet mix, which sees only a relatively small part of their balance sheets in a marked-to-market environment, iii) Australian bank regulatory capital positions are MTM for the impact of rate rises, and iv) strong capital positions, with fully-loaded CET1 ratios at close to 18%.

One risk to consider

There is one risk that the broker sees for the banks. Though, not one that could send them into receivership.

That risk is increasing competition for deposits. Goldman explained:

For some time we have been highlighting that funding costs remained the key risk to the banks in 2023; a risk that has been further catalysed by the dislocation in global funding markets over the past fortnight. We estimate the Australian banks’ term wholesale funding requirements over the next three years will be one-third higher than the average issuance over the last six years.

To the extent that we expect this to drive greater levels of deposit competition, we note that our weekly product pricing database suggests that term deposit betas have averaged c. 0.75 this cycle, versus the 1.0 we have seen in previous rate cycles, with deposit betas having been as high as 1.2. Our forecasts already assume term deposit betas revert to 1.0 over this cycle, which represents an 11bp headwind to bank NIMs. To the extent this increased to 1.2, it would be an 8bp incremental hit to our NIM forecasts.

Which ASX 200 bank share should you buy?

In light of the above, the broker continues to believe that Westpac Banking Corp (ASX: WBC) is the best ASX 200 bank share to buy right now.

So much so, it has reiterated its conviction buy rating with a $27.74 price target. Goldman concludes:

We reiterate our Buy (on CL) recommendation on WBC given: i) while NIM pressures are accelerating across the sector, WBC’s shorter-duration replicating portfolio, and current balance sheet performance, should see its NIM outperform peers, ii) despite WBC recently revising its FY24E cost target to A$8.6 bn (from A$8.0 bn), the bank’s performance on cost management remains strong in this inflationary environment with a 9% step down in underlying costs expected over the next two years, iii) the stock is trading at a 25% 12-month forward PER discount to peers (historically a 3% discount), and iv) our TP of A$27.74 offers 36% TSR.

The post Goldman ‘remains confident in the health’ of ASX 200 bank shares and names it top pick appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has positions in Westpac Banking. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking. 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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