The full year results from Commonwealth Bank of Australia (ASX: CBA) and the trading updates provided by the other big banks have left investors feeling upbeat about the sector, but that doesn't mean the Big Four are equally well positioned to the upside in the current financial year.
This is despite the fact that most have managed to hand in a better-than-expected earnings result due in large part to the upward repricing of loans and the ongoing benign credit environment that is supported by a robust jobs market. Even though wage growth isn't what it's supposed to be.
There's no doubt that the risks are rising for banks as record high household debt, the unexplained inability of workers to demand a bigger pay check, higher inflation risks, and the prospects of more expensive debt can create the perfect storm for delinquencies.
But for now, investors are happy to overlook these risks as the Goldilocks conditions for our banks continue to roll on.
While I believe investors are usually better off focusing on the long-term, I don't think it is a bad idea to switch to a shorter-term view when it comes to the Big Banks as their nearer-term prospects look far rosier than their medium-term outlook.
The question then is which bank will provide you the best bang for your investment buck for the short-term?
Here's a hint – it isn't Commonwealth Bank of Australia even though it posted an underlying result that was slightly ahead of consensus forecasts. Its solid result was aided by higher margins and historically low bad debts and loan arrears.
The problem with Australia's largest listed bank is governance. Despite its solid earnings and upbeat near-term outlook, it is hard to see how the bank can outperform its peers when it faces money laundering charges and a change in leadership.
Macquarie Group Ltd (ASX: MQG) may have the answer for you. Its analysts think National Australia Bank Ltd. (ASX: NAB) has the best near-term upside based on third quarter earnings trends and relative valuations. The bank delivered solid revenue growth in the quarter even though markets income moderated to more normal levels.
This suggests that National Australia Bank's earnings quality has improved, according to Macquarie who has an "outperform" recommendation on the stock and a price target of $33 a share.
The broker also thinks that Westpac Banking Corp (ASX: WBC) is another with good near-term prospects. While Westpac doesn't give quarterly updates, its second-half revenue performance should be favourable given its overweight position to investor mortgages and easing funding costs, noted Macquarie.
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