Over the last week or so, each of the major commercial banks has updated the market on how they are trading. For ANZ, NAB and Westpac, this was through the release of a detailed half year financial report. For Commonwealth Bank (CBA), which has a different reporting cycle, it was via a brief third quarter trading update.

In summary, the reports largely met expectations. The themes were very consistent: after rising strongly, the net interest margin has peaked due to intense competition in the deposit and home lending markets; credit growth has slowed and volume growth is weak; bad debts are rising albeit from very low levels; expenses are being controlled but are pressured by inflation and the banks are very well capitalised. Looking ahead, flat to very low single digit earnings (profit) growth is expected.

This outlook is reflected in the banks’ share prices, which haven’t been star performers over the last 12 months. The table below shows that ANZ has been the best performer on a relative basis, marginally in front of the CBA. NAB been the worst performer. This all said, the differences are relatively small. Further, each bank has underperformed compared to the overall market over this period (+9.4%).

So, what can we expect over the next 12 months? Market relative or marginally below relative performance, that’s my hunch. That is, the banks will be seen as relatively defensive stocks for their certainty of dividend income, so they will be better bid when the market is under pressure, but in a strong rally, somewhat left behind as the market searches for stocks with better growth prospects.

And what of the individual banks? Given that their strategies are so similar and there is so much inertia in the market, I am not expecting major differences in performance. But let’s have a look at how they are performing on some key attributes plus what the brokers have to say with a view to suggesting how you may want to play them.

Profit for last half year (1H23)

ANZ: Cash profit $3.8bn for 1H23, up 12% on 2H22 and 23% on 1H22.

NAB: Cash profit $4.1bn for 1H23, up 12% on 2H22 and 17% on 1H22.

Westpac: Net profit of $4.0bn for 1H23, up 10% on 2H22 (excluding notable items) and up 22% on 1H22. (Westpac has ceased reporting ‘cash profit’, now reporting ‘statutory profit’).

CBA: Cash profit of approximately $2.6bn for the March quarter, up 1% on quarterly average in 1H23 and 10% on 3Q22.

Operating performance for 1H23

ANZ: Underlying profit (before bad debt provisions) of $5.5bn up 15% on 2H22 and 33% on 1H22.

NAB: Underlying profit of $6.1bn, up 18% on 2H22 and 26% on 1H22.

Westpac: Underlying profit of $5.9bn, up 15% on 2H22 and 24% on 1H21

Volumes

ANZ: Home lending portfolio grew by $11bn to $290bn. Business lending in Australia was flat. New Zealand loans down by NZ$0.2bn.

NAB: Home lending portfolio grew by $4bn to $333bn. Business lending in Australia grew by grew by $4.9bn. New Zealand loans grew by NZ$1.9bn.

Westpac: Home lending portfolio grew by $5bn to $473bn. Business lending grew by $1.0bn. New Zealand loans grew by NZ$1.4bn.

CBA: Home lending grew by $6.9bn in the quarter to $577bn. Business lending grew by $2.6bn in the quarter.

Margins

ANZ: Net interest margin rose by 7bp from 1.68% in September to 1.75%. Excluding liquidity and markets, the NIM was 1.83%.

NAB: Net interest margin rose by 10bp from 1.67% in September to 1.77%. Excluding markets and treasury, NIM was 1.80%.

Westpac: Core net interest margin rose by 10bp to 1.90%. Excluding liquidity and markets, the NIM was 1.94%.

Expense growth

ANZ: Expenses up 3.7% on 2H22. Projected increase for the full year is circa 5%.

NAB: Expenses up 2.6% on 2H22. Excluding the acquisition of the Citibank business, expenses rose by 1.2%.

Westpac: Operating expenses, excluding notable items, fell by 1% on 2H22.

Bad debts

ANZ: Credit impairment charge of $133m. In 1H22, a negative charge (writeback) of $284m.

NAB: Credit impairment charge of $303m compared with $2m in 1H22.

Westpac: Credit impairment charge of $390m compared to $139m in 1H22.

Capital

ANZ:  CET1 (Level 2) (Common Equity Tier One) ratio rose to 13.2%. If the acquisition of Suncorp proceeds, this will drop to 12.1% on a pro-forma basis.

NAB: CET1 (Level 2) ratio of 12.2%.

Westpac: CET1 (Level 2) ratio of 12.3%.

CBA: CET1 (Level 2) ratio of 12.1%. CBA is currently doing an ‘on-market’ buyback on $3bn which is approximately two-thirds complete.

Return on Equity

ANZ: 11.4%

NAB: 13.7%

Westpac: 11.3%

Dividend

ANZ: Interim dividend of 81c per share, up 9c on FY22 interim.

NAB: Interim dividend of 83c per share, up 10c on FY22 interim.

Westpac: Interim dividend of 70c per share, up 9c on FY22 interim.

Strategic Differences

ANZ:  New Zealand and Institutional Banking are relatively more important. In Australian retail, the Bank has high hopes for its new retail banking platform, ANZ Plus.

NAB: Market leadership in business and private banking. Aiming for disciplined growth in other businesses. Ubank for new customer acquisition.

Westpac: Is still building a “simpler, stronger bank”, although the “fix” part is coming to an end. Will put more focus on institutional banking and business banking.

What do the brokers say?

The major brokers are marginally bearish on the banking sector. Within the sector, their picks are ANZ and Westpac. The following tables list broker recommendations, target prices and forecast earnings for the 4 major banks (source: FN Arena). It highlights that the differences between the banks are at the margin. While strong conclusions are hard to draw, the following statements can be made:

• Westpac is seen as having the most upside potential, with a consensus target price of $23.75, 12.6% higher than the last ASX price of $21.09;
• Citi and UBS prefer ANZ. Morgans and Ord Minnett prefer Westpac;
• All the brokers (with the exception of UBS) feel that CBA is over-valued;
• On earnings and multiples, ANZ and Westpac are the “cheapest”, followed by NAB and then CBA;
• The brokers forecast that earnings (profit) will be lower in FY24 than FY23; and
• Westpac has the highest forecast dividend yield at 6.8%.

Which bank do I like?

I think Westpac has made headway with some of the key metrics (volume growth, expense management, return on equity and capital strength), and is starting to match it with the other banks. The headway, however, hasn’t been reflected in the share price.

Commonwealth Bank continues to be super expensive (a PE around 16-17 compared to 10-12 for the other three majors), but it is the stock that the institutions turn to first in any market crisis or downturn. It is the most “defensive” of the banks.

The brokers have moved away from NAB and now prefer ANZ.

In reality, the differences between the major banks are small and it is arguably more important to get the sector allocation right rather than the individual banks. However, within the sector I fancy the barbell approach – the most expensive and the cheapest. I am going for CBA and Westpac.

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.