Broker warns that small lenders are set to beat ASX bank shares

The best way to gain exposure to the housing recovery isn’t through ASX banks but their smaller rivals.
The post Broker warns that small lenders are set to beat ASX bank shares appeared first on The Motley Fool Australia. –

The V-shape residential market recovery has sent ASX bank share prices rallying, but Citigroup believes you should be banking on their smaller ASX rivals instead.

This is because ASX big bank shares aren’t as leveraged to the housing market as non-bank financial institutions (NBFIs).

That’s grim news for ASX banks as the sector has outperformed on the housing rebound.

ASX banks’ outperformance is coming back to bite them

The Commonwealth Bank of Australia (ASX: CBA) share price, Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price, National Australia Bank Ltd. (ASX: NAB) share price and Westpac Banking Corp (ASX: WBC) share price have beaten the S&P/ASX 200 Index (Index:^AXJO) over the past year.

Their big rally leaves them more vulnerable to bad news even though their operating environment appears bullish.

Rising house prices are usually a tailwind for the sector. But this time is different as the rebound is driven by record low mortgage rates, noted Citigroup.

Why emerging lenders are better buys than ASX banks

“Despite recent investor fears, lenders have plentiful cheap funding to maintain these record low rates, but housing affordability is set to slow house prices,” said the broker.

“Loan demand is broadening. However, this spells trouble for Major Bank revenue growth, which is expected to be lower than previous cycles.

“NBFIs, fuelled by rising borrower demand and falling funding costs, can drive ~7% revenue growth, to lead the sector.”

In contrast, Citi is forecasting around a 5% increase in revenue for ASX bank shares, which is lower than previous cycles.

ASX NBFIs trading at an unwarranted discount

Despite the superior revenue growth profile for NBFIs, these ASX shares trade at a discount to ASX banks. Citi believes this presents a unique opportunity for investors.

“The NBFIs are expected to be the ultimate beneficiaries of the recent up-cycle in house prices,” said the broker.

“At an average ~12x PE [price-earnings], below the Major Banks (~16x) and Regional Banks (~14x), the NBFIs are not currently reflecting their mortgage revenue growth prospects.”

Shares to buy over ASX banks

Citi’s two favourite NBFIs are the Liberty Financial Group Ltd (ASX: LFG) share price and Australian Finance Group Ltd (ASX: AFG) share price.

The broker upgraded its FY22 and FY23 cash earnings estimate for both ASX shares by 5% to 8%, each.

This isn’t to say that the outlook for ASX bank lenders is grim. If anything, the Macquarie Group Ltd (ASX: MQG) share price is a standout due to its strong deposit base.

However, Citi pointed out that the Macquarie share price is looking fully valued at current levels.

The post Broker warns that small lenders are set to beat ASX bank shares appeared first on The Motley Fool Australia.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of May 24th 2021

More reading

Why are ASX 200 bank shares in focus on Wednesday?

How is the NAB share price reacting to the possible Citi buyout today?

The Orocobre (ASX:ORE) share price hit an all-time high today
What to consider before investing in blue-chip ASX shares

ASX 200 midday update: Afterpay & Zip sink, Orocobre rises on broker upgrade

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, Macquarie Group Limited, National Australia Bank Ltd. and Westpac Banking Corporation. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!