Negative sentiment surrounding the reporting season is "overdone", with banks delivering a solid performance, according to Morningstar.
In a report titled Australia and New Zealand Reporting Season Wrap, Morningstar found that despite challenging operating conditions, banks performed well during the past earnings season.
“Balance sheets are strong, capital ratios of all four banks in the top quartile of global banks. Funding and liquidity levels are sound,” the report said.
According to Morningstar, banks have acknowledged the potential for tougher capital rules – “but we estimate this will be satisfied organically and from dividend reinvestment plans”.
Across the banking sector, residential lending is growing at 6.5 per cent, business credit growth at 6.2 per cent and deposit growth at 9 per cent. Return on equity is also sitting at close to 15 per cent, the report stated.
Morningstar also noted that “the banking sector is cheap” – all four major banks, the report said, are trading at 20 per cent discounts to “fair value estimates”.
More broadly, the report found that despite headwinds, the economy and earnings are “holding up”.
“Strength in residential construction produced some better-than-expected building material results, some retailers performed well in an environment of higher import prices, and banks demonstrated their resilience," it said.
Van Eck Global also reinforced that the broader reporting season surprised to the upside.
“The contrast between the surprisingly good year that many companies have reported and the 13.73 per cent fall in the S&P/ASX 200 Index over the same period is striking,” Van Eck Australia director, investments and portfolio strategy, Russell Chesler said.
Morningstar maintained that, subsequently, preferred sectors are banks, healthcare and defensives.