Citi runs the ruler over the banks and is positive on the majors into 2023

Citi was out with a note recently, sharing their view on the Aussie banks.

They note they are starting 2023 with a positive outlook, as the sector aims to outperform for a third consecutive year.

This is view broadly shared by Matthew Davison of Martin Currie, who shared his thoughts in an article for Livewire Markets, titled Banks have bounced back from concerns.

3 key themes

Citi notes that whilst many others are forecasting a tough time for the banks in calendar ’23, there are three key themes that they believe could deliver upside:

1. Whilst deposit rates are rising, deposit spreads suggest net interest margins (NIMs) won’t peak until 2H23 – meaning further upside for bank margins

2. Debt market fragilities will keep business credit growth elevated

3. Asset quality decline will be slow to impact bank profitability

Citi’s earnings forecast for the majors is 7-10% ahead of consensus, due to higher and more persistent NIMs, stronger business lending growth, and slow to emerge bad and doubtful debts (BDDs).

Who does Citi see as a buy?

In terms of Citi’s order of preference for the big four, ANZ Banking Group (ASX:ANZ) and Westpac Banking Corporation (ASX:WBC) are at the top of the list, both with a BUY rating.

Citi likes the fact that ANZ is “institutionally-dominated”, whilst the cost-out story makes WBC attractive.

As for National Australia Bank (ASX:NAB) and Commonwealth Bank (ASX:CBA), Citi notes that the expectation of slowing lending in mortgages and small-to-medium enterprises (SME) could be a headwind.

Citi is neutral on NAB, and has a SELL rating on CBA.

When it comes to the regionals, there isn’t much love from Citi even though “their valuations appear cheap”.

Citi points to a funding advantage for the majors.

Citi is NEUTRAL on both Bendigo and Adelaide (ASX:BEN) and Bank of Queensland (ASX:BOQ).

A look at ANZ's six month charts