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The June 30 reporting season moves up a gear this week, with the highlights being full-year reports from Commonwealth Bank (CBA) on Wednesday and AGL (AGL) on Thursday.
Undoubtedly, CBA’s result will be over-shadowed by the scandal surrounding the bank’s apparent breaches of Australia’s money-laundering rules, with the Australian Transaction Reports and Analysis Centre (AUSTRAC) alleging 53,700 breaches of the rules surrounding the reporting of deposits of $10,000 or more, into its ATMs.
After the financial planning, Comminsure and IT contract bribery scandals, the AUSTRAC allegations are the very last thing that Commonwealth Bank’s 800,000 shareholders want to see – especially with the lurid headlines about the potential fine of $18 million for each breach – or a cool $967 billion.
Whatever penalty emerges, it will not be that much. So, CBA shareholders should concentrate this week on the FY17 profit result.
It’s going to be a belter: CBA will report a full-year profit of somewhere around $9.7 billion, a record amount, and a rise of about 2.6%. On an earnings-per-share (EPS) basis, FNArena’s figure of the analysts’ consensus expectation of 557.1 cents would represent a 0.4% rise; Thomson Reuters has analysts expecting 554.7 cents.
For many shareholders, the dividend is the most important number in the result: both FNArena and Thomson Reuters predict 424 cents, placing CBA on a 5.2% fully franked yield, which grosses-up to 7.5%.
With analysts expecting CBA to boost its dividend in FY18 – FNArena says 430.3 cents, Thomson Reuters projects 432 cents – those dividend yields should rise. But shareholders will be concerned that the new capital requirements, the bank levy – and now the possible penalties from the AUSTRAC case – may affect their dividends.
Analysts say the proposed bank levy could take about 4%–5% off bank earnings. And last month the Australian Prudential Regulation Authority (APRA) finalised its capital requirements, which were CET1 (common equity tier 1) ratios were lifted by 150 basis points (1.5%) for the major banks and 50 basis points (0.5%) for the regional banks, with the new capital targets to come into effect by January 2020.
The other most important numbers for CBA (and any bank) are the “jaws” – the balance between income and costs – and the net interest margin (NIM), what the bank pays for deposits compared to what it charges for loans (in effect, the profit from lending.)
Margins are definitely feeling the strain of higher funding costs. According to KPMG, at the half-year point of FY17, the big four banks had an average net interest margin of 2% on a cash basis, down 0.03% from six months earlier. That is getting down to record low levels, but analysts expect them to expand this, on the back of the latest round of mortgage repricing, given their strong market position.
Regardless of what the Reserve Bank of Australia (RBA) has done, the big banks have raised residential lending rates four times since December 2016, helping to offset slowing credit growth. The big question is whether they can keep doing that to boost profitability as loan growth slows.
The banks have indicated that they intend to cut costs even more than they have done: investors should pay close attention to cost growth. There could be some upside surprises on this front, with cost growth cut back.
CBA does appear fully priced. FNArena says the analysts’ consensus price target on the stock is $80.93, just 15 cents (0.2%) ahead of the current share price: Thomson Reuters puts the analysts’ consensus price target at $83.20, implying potential upside of 3%.
Other major stocks reporting this week are global hearing implant leader Cochlear on Wednesday, and local energy heavyweight AGL Energy on Thursday.
In May, Cochlear reconfirmed its earnings guidance for investors to expect a full year net profit between $210 million to $225 million, which would be up 10% to 20% on the prior year. The guidance was re-affirmed despite the recent news that Chinese government tenders were expected to be below FY 2016’s levels (a result that was not factored into the original guidance.)
Analysts expect a 17% boost in EPS from Cochlear and a similar rise in the dividend – however, Cochlear is not a yield play, offering a 1.9% fully franked yield on FY17 consensus numbers. And the capital gain outlook does not appear promising, either: FNArena has an analysts’ consensus price target of $132.78, which is 6.3% below the current price of $141.66: Thomson Reuters puts the analysts’ consensus price target even lower, at $129.69, a discount of 8.4%.
AGL is one of broker UBS’ potential upside surprise candidates for this earnings season, although the electricity and gas price rises it recently announced will not show up in the results, having taken effect on July 1. AGL is expected to report net profit of about $744.2 million, with FNArena’s analysts’ consensus estimate projecting 117.9 cents in EPS – up from a loss of 60.5 cents a share last year – and Thomson Reuters’ collation of forecasts pointing to a consensus expectation of 118.1 cents. FNArena says analysts expect a dividend of 89.2 cents, up 31% on the 68 cents paid in FY16, while Thomson Reuters has analysts expecting 88.3 cents, franked to 89.35%. That puts AGL on a dividend yield of about 3.5%.
FNArena says the analysts’ consensus price target for AGL Energy is $27.04, about 6.7% above the current share price; Thomson Reuters puts the consensus price target a bit lower, at $26.22.
On Thursday, AMP reports half-year numbers, with about $460 million expected for interim net profit and 14 cents for the dividend: that profit would compare poorly with the $523 million profit reported a year ago (the dividend was also 14 cents). AMP has struggled with the structural decline in the life insurance industry, and is trying to sell its loss-making insurance arm and reorient itself to higher-growth businesses in wealth management such as services for SMSFs, AMP Bank, AMP Capital and its operations in China.
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