Matthew Davison

Matthew Davison, Portfolio Manager at Martin Currie Australia has cautioned that Commonwealth Bank of Australia’s (CBA) recent upgrade cycle may be drawing to a close, despite the bank continuing to post robust results.

“CBA is still delivering solid performance with modest growth, but sequential momentum is weakening as cost and reinvestment pressures offset stable margins and strong loan growth,” he said. “The return on equity (ROE) and growth trends remain disconnected from the current valuation.”

The latest result came broadly in line with consensus expectations, with no major surprises. “We saw a small beat on trading income, but this was offset by higher costs. There were no shocks on asset quality. Investment spending is running higher, particularly in AI – something that will be seen as a positive by some investors.”

However, he remains cautious on the stock’s outlook. “We would consider this stock as a ‘sell’ / hold underweight. CBA trades at a significant premium to our valuations and to its key peers – nearly 4x price-to-book and 29x price-to-earnings. This premium is disconnected from the ROE and growth trends we see in these results and has been disproportionately driven by passive flows.”

“Net interest margins (NIMs) are stable for now, but deposit competition is intensifying, and the tailwind from prior interest rate rises is fading. Over time, valuations remain very vulnerable to any shift in sentiment around credit risk – something that would also affect risk-weighted assets and credit charges. History suggests there’s also a risk that liability margins worsen.”

And current valuations are stretched. “We’d rate the market at a 4 on a scale of 1 to 5 for expensiveness. Value spreads are relatively wide. We haven’t had a strong bias on earnings revisions given the decent economic data and rate cut expectations lifting some cyclical activity. We see value as stock-specific rather than sector-wide, with attractive names in insurance, contractors, iron ore, energy and travel.

“Looking ahead prevailing valuations remain the key concern. Underlying earnings appear to be trending sideways under persistent cost pressures, and credit charges will eventually rise, pulling down reported profits. While NIMs are stable for now, deposit competition is building and the benefits from earlier rate rises are easing.

“Within the Banks, we prefer ANZ. ANZ still trades at a discount to peers largely due to sentiment rather than fundamentals, and we think the new CEO has the opportunity to improve cost discipline and close that gap.”

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Senior analyst Matthew Davison and quantitative analyst Sam Li have been given new roles as Portfolio Managers.

Reece Birtles, Chief Investment Officer, Martin Currie said: “The Martin Currie team are known for their focus on continuous development and tailored investment options for clients. Our strong 18-strong member investment team has an average tenure of 12 years, and average industry experience of 20 years across a variety of industry backgrounds.

“These promotions tie in with our recently launched Martin Currie Active Insights strategy and both Matthew and Sam bring fundamental and systematic style neutral portfolio construction skills. Both of them have a unique mindset to extract the best fundamental insights from the broader team, deliver alpha, and communicate their edge to clients, consultants and broader investor group.”

Since joining Martin Currie in 2013, Davison has demonstrated fundamental research insight with his financials coverage, portfolio construction, process development involvement and strong communication skills with clients.

“With his understanding of the funds management industry through his financials research coverage, and keen interest in true fundamental insights, Matthew is perfectly placed to evolve the Active Insights strategy,” added Birtles.

In the 18 months since joining Martin Currie in 2021, Li has also made a tremendous contribution to the development of the Active Insights strategy, said Birtles.

Li’s academic background and work experience provides him with unique expertise to continue to evolve the investment process, he said.

Prior to joining Martin Currie Davison worked at Merrill Lynch for nine years as lead banking analyst. He has also worked at Citigroup Smith Barney for two years as an equity research analyst in the financials team and at National Australia Bank for three and half years in its M&A division, where he was involved in a number of large transactions.

Li worked as a Quantitative Developer at Frontier Advisors and was responsible for delivering quantitative solutions externally and internally, before joining Martin Currie in January 2021. Li has also worked for NAB as a quantitative analyst developing statistical models.

Martin Currie currently manages over A$31 billion in assets under management, and A$8 billion in Australian equities (as of 30 June 2022).

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Matthew Davison

Australian house prices have risen to record levels, with the near unprecedented acceleration triggered by, among other factors, the COVID-19 pandemic crisis response to cut interest rates to near zero levels.

In a recent research article, Matthew Davison, Senior Research Analyst for Martin Currie Australia, part of Franklin Templeton, discusses that while the national house price moves look to have outrun their fundamentals, the associated boost in economic activity will release over-zealous provisions and improve the outlook for bank credit growth and earnings.

He notes: “We believe that the over-zealous provisions have further to be released as the broader economic buoyancy flows through to an improved outlook for bad debts and further earnings momentum.

“The outlook for consensus bad debts assumes much of this provision build is still utilised into 2022.

“We think the evidence is to the contrary, and as a result we should continue to see positive earnings momentum as the market improves their forward-looking bad debt forecasts for the banking sector.

“Overall, in our Value Equity strategy, we are favouring on overweight position to banks, with higher active weights in ANZ Bank and NAB, a neutral position in Westpac, and an underweight in Commonwealth Bank (albeit we materially reduced this earlier in the year), due to the potential for valuations to better reflect bad debt unwinding, capital returns and improved credit growth.

“From our Equity Income strategy, which focusses on Sustainable Dividends, we like the dividend opportunities from all banks, but we see Westpac’s dividend having a slower dividend recovery than its peers,” he notes.

Read the full article.

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