Over the last week or so, three of the four major banks have reported their half year profit results. Dominated by the provision each bank made for the Covid-19 pandemic and dividend deferrals, the results overall were underwhelming. They highlighted the ongoing pressures banks face – flat to falling volumes, flat to falling margins, pressure on non-interest income, additional compliance and risk management costs and now due to COVID-19, a material blow out in bad debts. 

When I reviewed these banks exactly 6 months ago, I nominated Westpac “by a nose” as my  pick, noting that there was little to choose between them. For bank shareholders, it has turned out to be a very disappointing period. Including dividends, Westpac has lost 40.5% over this period, with NAB and ANZ only marginally better at -39.6% and -37.0% respectively. In a relative sense, Commonwealth Bank (which next reports in August) outperformed, keeping its loss to 22.2%. 

So is Westpac still my pick? And what do the major brokers say? Who is their top pick? Here is an analysis of the three major bank reports and insights from the major brokers. First, let’s look at their performance over a number of key attributes. 

Capital 

ANZ:  CET 1 (Common Equity Tier One) ratio is now at the lower end of its peers at 10.76%. On a proforma basis, it rises to 10.9%. Some analysts consider that a capital raising remains a possibility. 

NAB: Announced a $3.5bn capital raising which will lift its CET 1 ratio upon completion to 11.20%. 

Westpac: CET 1 ratio of 10.81%. 

Covid-19 provision and bad debts 

ANZ: Booked a provision of $1,031m for Covid-19, total credit impairment charge of 0.53% (as a percentage of gross loans and advances). Collective provision is 1.17% of credit risk weighted assets. 

NAB: Booked a provision of $807m for Covid-19, total credit impairment charge of 0.38%. Collective provision is 1.21% of credit risk weighted assets.   

Westpac: Booked a provision of $1,619m for Covid-19, total credit impairment charge of 0.80%. Collective provision is now the highest at 1.40% of credit risk weighted assets. 

Dividend 

ANZ: Deferred interim dividend. Committed to updating the market in August regarding status. 

NAB: Interim dividend of 30c per share, down from 83c in FY19. 

Westpac: Deferred interim dividend. No timetable outlined, but “the Board will continue to review dividend options over the course of the year.” 

Operating Performance in FY19 

ANZ: Cash profit from continuing operations and excluding large notable items such as customer remediation costs fell by 26% to $2,451m. Cash profit on a continuing basis down 60% (cw 1H19) to $1,413m. 

NAB: Cash profit excluding large notable items fell by 24.3% to $2,471m. Cash profit at $1,436m down 51.4% (cw 1H19). 

Westpac: Cash profit excluding large notable items fell by 42% to $2,278m. Notable items (including $1,027m provision for AUSTRAC fine) resulted in a cash profit of $993m, down 70% cw 1H19. 

Volumes and margins 

ANZ: Home lending portfolio fell by $1bn in the half year from $265bn to $264bn. Institutional lending assets grew by 12% . Markets and treasury income (considered by analysts to be “low quality income”) rose. Underlying NIM (net interest margin) fell by 4bp (0.04%) in second half, down 3bp overall. 

NAB: Home lending portfolio fell by $2bn in the half year from $304bn to $302bn. Business lending flat, institutional lending up. A fall in markets and treasury income of $250m impacted the result. The group net interest margin remained stable at 1.78%. 

Westpac: Home lending fell by $3bn from $449bn to $446bn. Business loans also down, offset by increase in institutional loans and increase in New Zealand. General insurance claims impacted non-interest income. Overall net interest margin flat, but down 3bp excluding treasury and markets contribution. 

Expense growth 

ANZ: Operating expenses excluding large notable items up 1%, flat if adjusted for foreign exchange movements. 

NAB: Operating expenses excluding large notable items up by 0.4% for the half year. 

Westpac: Operating expenses excluding large notable items and asset write-downs up 1.4% for the half year. 

Strategy 

ANZ: No change under CEO Shayne Elliott. An Australasian retail and commercial bank. Focus on productivity and operational agility, with prudent risk settings. 

NAB: New CEO Ross McEwan firmly in the driver’s seat, with a new Executive Leadership Team. Focus on a simpler, more streamlined business with clear accountability. Separation and divestment of MLC being prioritised. 

Westpac: New CEO (Peter King) and Chairman. Focus on simplification and improving risk management. Flagged potential sale or dis-investment of wealth businesses (superannuation, wealth platforms such as Panorama, life insurance, general insurance etc) by combining in new specialist business unit and conducting strategic review 

What do the brokers say? 

The major brokers are positive on the banking sector. Within the sector, there is no clear standout. 

The following tables lists broker recommendations and target prices, and consensus forecasts, for the 3 major banks (source: FN Arena). It highlights that the differences between the banks are very much at the margin. While strong conclusions are hard to draw, the following statements can be made: 

• NAB is the most preferred bank, although it has the least “upside” to reach its target price (13.1% from $16.08 to $18.28 vs 23.8% for ANZ); 
• Macquarie and Ord Minnett prefer NAB, while UBS opts for ANZ and Westpac is Morgans’ pick; 
• On multiples, the brokers have NAB trading on a multiple of 11 times FY21 earnings, while ANZ and Westpac are trading on 10 times (the FY21 year forecasts exclude any “notable” items); and 
• Dividends are forecast to return to around 100c per share in FY21. This year, the forecast ranges from 46c for ANZ to 68.3c for NAB, the latter higher due to the payment of an interim dividend. 

Bottom line 

Westpac raised the largest provision to cover COVID-19 and its collective provision of 1.40% is arguably more conservative than the other banks. At 10 times FY21 forecast earnings, it is cheap historically (for many years, it was the clear “number 2” behind the Commonwealth Bank in terms of pricing multiples). Divestment of its wealth businesses may ease any pressure on capital and associated earnings pain. The flipside, it has a new CEO, the Austrac provision may be insufficient, and it has hard yards to do on risk and compliance. 

National Australia Bank (NAB) is now in good shape in regards to capital, but its provision for COVID-19 may need to be topped up. It is doing a better job on costs, and earnings were hit by a fall in volatile markets and treasury income. CEO Ross McEwan is firmly in the driver’s seat, but the bank has a long way to go to bring its technology up to scratch and simplify its processes. On multiples, it is trading at a small premium to both ANZ and Westpac. 

ANZ’s capital position could yet be challenged, with some analysts speculating that a raising may be required. It is probably doing the best job on costs, but balance sheet growth is coming from its institutional business (an area that had been de-prioritised). With the brokers, it has the highest target price. 

Despite the major brokers being more supportive of NAB, I am going to stick to Westpac by a nose over NAB. ANZ a further half head behind. But it is all quite marginal. 

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.