Over the coming weeks, the major banks (and Macquarie) will report their full year earnings. Known as ‘bank reporting season’, this provides a ready opportunity for investors to compare and contrast the fortunes of these very major companies.
The schedule is as follows:
Friday 3 November Macquarie 1st half result
Monday 6 November Westpac Full year result
Thursday 9 November NAB Full year result
Monday 13 November ANZ Full year result
Tuesday 14 November CBA 1st quarter update
What should you look out for in these reports? Who could star, and who do the brokers fancy? Here is my take.
But before that, let’s take a closer at how the banks have been faring on the share market over the last 12 months and since the start of FY24.
Overall, the banks have been underperformers compared to the market. The average return of the four major banks is a loss (including dividends) of 1.5%, while the S&P/ASX 200 has returned 6.8%. ANZ and CBA have been the best, while Westpac is the laggard.
However, the short-term story (this financial year) is quite different. In a period when the market has been under pressure, the major banks have held up well, enjoying on average a small positive return of 3.5% compared to the overall market’s negative return of -2.8%. Their defensive characteristics, plus also being beneficiaries of higher interest rates, has helped.
NAB and ANZ have been the best performers, the former recovering in part from a sharp sell down following its half year result in May.
Major Bank Performance – this financial year
Things to watch in reporting season:
- Cash profit
ANZ reported a cash profit for the first half of $3.8bn. It didn’t provide a number with its third quarter update but did show small asset growth and benign credit provisioning. Pressures on net interest margin may impact, leading to a half year outcome of $3.7bn. A full year result of $7.5bn would represent growth of 15% over FY22.NAB’s first half cash profit was a touch under $4.1bn. It reported a third quarter outcome of $1.9bn, which disappointed the market. For the half, the market is expecting around $3.8bn, about 7% lower than the first half. This would give a full year result of $7.9bn, up 11% on FY22.
Westpac’s has stopped reporting ‘cash profit’ and now just reports statutory profit. This makes comparison to FY22 and earlier years difficult, particularly as there were a large number of abnormal items and contributions from now discontinued businesses. For the first half, Westpac reported a statutory profit of $4.0bn, and for the third quarter, a statutory profit of $1.8bn. A half year outcome of $3.6bn would take the full year profit to $7.6bn.
CBA’s first quarter cash profit should come in at $2.5bn. - Net interest margin (NIM)
The market will look very closely at the trajectory of the net interest margin (essentially the difference between the average lending interest rate and the average deposit rate). Second half NIM is expected to be marginally down on the first half, due to competitive pressures in the home loan and term deposit markets, higher spreads on international funding plus the expiry of the RBA’s term funding facility (which Banks must essentially refinance). The latter was a major driver in the compression of BOQ’s NIM, which reported a 21bp decline in the half year to August. Offsetting these will be a higher return on equity capital and replicating portfolio, plus non interest rate sensitive deposits
Comments about “NIM considerations” will be closely scrutinized for information about the margin trajectory. This might relate to competition for deposits, the level of liquids being carried, basis risk and hedging costs etc. - Volume growth
Overall, volume growth will be minimal. In mortgages, where some banks (led by the CBA) have chosen to cease offering “cash backs” to new borrowers, mortgage books may even have declined. According to recent APRA data, CBA went backwards in July and August, whereas ANZ and Macquarie went forwards.
Noting that “cash backs” seriously impact the profitability of the product and the very deliberate decision by CBA and others to pull back, the market might not put too much weight on mortgage volume growth. If anything, attention might switch to growth in business loans as a better gauge of the organisation’s ability and dynamism to respond. - Cost control
While the market would like to see flat operating costs (compared to the first half), in an inflationary environment of higher staff and other operating expenses, cost growth in the very low single digits will be tolerable.
Any bank that can show flat costs (or better still, a reduction in costs) will enjoy a very positive response from investors. - Bad debts
Bad debts (impairments) are expected to be low, below the long-term average. They won’t be negative, but they won’t be anywhere as high as might have been imagined twelve months’ ago. Higher interest rates are yet to really bite. - Dividends
With a bit of uncertainty around additional Tier 1 capital (APRA has a discussion paper that may end the banks’ access to the listed hybrid market), Boards may be a touch more conservative when thinking about the dividend. Expect dividends to be largely the same as the first half, in keeping with market expectations.
The market is expecting:
ANZ: a final dividend of 81c (unchanged from the first half), but up from the final dividend of 74c for FY22;
NAB: a final dividend of 83c (unchanged from the first half), but up from the final dividend of 78c for FY22;
Westpac: a final dividend of 72c, up 2c on the first half of 70c, and the 64c paid as the final dividend for FY22. - Capital returns
Capital returns (through buybacks) are unlikely this time around. - CEO confidence on earnings trajectory
The outlook statement, particularly as it relates to expectations around the macroeconomic environment and the impact on banking, is a key part of the results presentation. Share prices are ultimately about future earnings, not about what has happened in the past, so the CEO’s confidence about the earnings trajectory is a really important piece of data.
What do the brokers say?
The table below shows by bank the recommendations and target prices from the six major brokers.
Collectively, they are the most positive on the ANZ, although Westpac has the most upside potential with a target price of $22.50 compared to Friday’s close of $20.86. ANZ’s upside of 6.6% is about the same.
In terms of “top pick”, UBS, Citi and Morgan Stanley like ANZ best, while Ord Minnett goes for ANZ and Westpac. Macquarie is the outlier preferring NAB, although it has an “underperform” on the sector.
Most of the brokers continue to feel that CBA is expensive. There are no “buy” recommendations (4 “neutral” and 2 “sell”), with a consensus target price of $91.00, 7.8% below Friday’s closing ASX price of $98.75.
Who will star? Who could surprise?
The market is expecting ANZ to “star”. It should show solid volume growth, plus reasonable cost control, and potentially deliver a flat result compared to the first half.
NAB is hard to read because its business mix is more focussed on small and mid-sized businesses, rather than retail. Considered to be the “star” by many 12 months’ ago (including me), it disappointed with its first half result. Maybe it was being a tad conservative. I am expecting it to do better this time around.
Who could surprise? The most obvious candidate is Westpac. With its strong retail deposit base, it could do well from the increase in interest rates. Further, if it has made measurable progress on its cost program, and delivers volume growth, it is capable of delivering an earnings surprise. But it is a big “if”.
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 regards to your circumstances.
