In in its Outlook for Financials Morningstar said the outlook for the banking sector is “rosy”, with loan growth slowly improving, costs tightly managed and bad debt at historical lows.
Morningstar sector head of financials David Ellis said trading conditions for the wide-moat rated major banks have improved in late 2013 and early 2014.
Mr Ellis said Morningstar anticipates earnings per share growth for the major banks of between 5.5 per cent and 7.5 per cent for the 2014 financial year and dividend payouts within the 70 to 75 per cent range.
“Our preferred exposures are the business-focused banks ANZ and NAB, based on attractive discounts to fair values,” said Mr Ellis.
Morningstar believes operating conditions for regional banks are also expected to improve through fiscal 2014 and 2015.
Mr Ellis said Bendigo and Adelaide Bank and Bank of Queensland are benefiting from the “long awaited recovery in housing finance, lower funding costs and improving loan quality.
“We forecast stronger earnings growth during fiscal 2014 and 2015, with a similar improvement in fully franked dividends,” he said.
Despite this, however, regional banks are still generating inferior returns on capital compared with the major banks.
Morningstar said it's also positive in its medium-term outlook for general insurers and considers QBE Insurance, Insurance Australia Group and Suncorp Group undervalued.
Mr Ellis said wealth managers are benefiting from “stronger and less volatile equity markets, improving investor confidence and strong long-term tailwinds delivered by Australia’s compulsory superannuation system”.
“Furthermore, there are signs risk aversion is easing, which is an earnings catalyst for the wealth manager as investors increase their portfolio weighting to higher-margin equity products,” he said.
Morningstar remains wary of infrastructure, however, with most regulated utilities overvalued given their “rich valuations and substantial earnings headwinds from the tough regulatory environment”.
