Last week, three of the major banks reported full year profit results (CBA will provide a third quarter trading update on Wednesday). Here’s a review of what we learnt and my position in relation to the question about how to play the banks going forward.

I continue to maintain that the commercial banks are expensive, largely ‘ex-growth’ and that an inevitable rotation will occur into other sectors, most likely resources. However, institutional fund managers remain reluctant to move out of the banks, in part because of an uncertain outlook for commodity prices.
Interestingly, three of the four major banks have underperformed over the last six months. ANZ, NAB and Westpac each have negative total returns (see table below), while the overall market’s total return (which includes dividends) is positive 0.9%. CBA, on the other hand, has soared as the institutions view it a little like gold, a safety play. Because it is so big in the index, they can’t take the risk of being too underweight. CBA is up 13.4% over this period.

* All dividends declared if shares owned from 8 Nov 2024
** Accumulation index, which includes dividends

In my biannual review of the major banks last November, I concluded as follows:

CBA continues to be super expensive, 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.
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 bank. However, within the sector I fancy the barbell approach – the most expensive and the cheapest. I am going for CBA and ANZ.

Well, I got the most expensive and the cheapest right, but ANZ remains the cheapest and hasn’t performed as well as the others. The ‘barbell” approach has worked, but I would have done better if I had stuck with Westpac.

Last week, three of the major banks reported full year profit results (CBA will provide a third quarter trading update on Wednesday). Here’s a review of what we learnt and my position in relation to the question about how to play the banks going forward.

Full year profit reports

In summary, the reports largely met expectations. The themes were consistent:

• the net interest margin was stable to marginally lower, with banks being more careful about chasing market share.
• credit growth was relatively weak with small volume increases; bad debts are low by historical standards although the forward indicators point to an increase in arrears.
• expenses are being controlled but are pressured by inflation.
• the banks are well capitalised.
• share buybacks are coming to an end.
• looking ahead, flat (or very low single digit) earnings growth, and steady dividends.

Profit for the half year

1. ANZ: Cash profit $3.6bn, up 12% on 2H24. Excluding Suncorp Bank (2 months profit in 2H24 and a full 6 months in 1H25), up 7.7% on 2H24 but down 8.1% on 1H24.
2. NAB: Cash profit $3.6bn, up 1% on 1H24 and 1.0% on 2H24.
3. Westpac: Net profit of $3.5bn, down 1.2% on 1H24 and down 3.9% on 2H24.

Operating performance for 1H25 (excluding bad debts) compared to 2H24

1. ANZ: Operating profit in banking (before provisions and excluding Suncorp) of $4.7bn in 1H25, down 2.0% on 2H24.
2. NAB: Underlying profit of $5.5bn in 1H25, up 1.9% on 2H24. NAB benefited from higher treasury and markets income.
3. Westpac: Pre provision profit $5.3bn in 1H25, down 1.9% on 2H24.

Volumes

1. ANZ: Home lending portfolio (including Suncorp) grew in half year by $10bn from $385bn to $395bn. Business lending in Australia (including Suncorp) grew by $1bn to $79bn. New Zealand loans grew by NZ$1bn.
2. NAB: Home lending portfolio grew by $6bn to $359bn. Business lending in Australia grew by $3bn to $158bn. New Zealand loans grew by NZ$2bn.
3. Westpac: Home lending portfolio grew by $7bn to $510bn. Business lending in Australia grew by $7bn to $106bn. New Zealand loans grew by NZ$1bn.

Margins

1. ANZ: Group net interest margin (NIM) fell by 2bp from 1.58% in 2H24 to 1.56% in 1H25.
2. NAB: Net interest margin flat at 1.70%. Excluding impact of markets and treasury, fell by 0.03%.
3. Westpac: Core net interest margin fell by 0.03% to 1.8%.

Expense growth (2H vs 1H)

1. ANZ: Expenses (excluding Suncorp) down 0.8% on 2H24. Including Suncorp, up 3.6%.
2. NAB: Expenses up 1.4% on 2H24.
3. Westpac: Expenses up 2.7% on 2H24.

Bad debts

1. ANZ: Credit impairment charge of $145m, down from $336m in 2H24 but up from $70m in 1H24.
2. NAB: Credit impairment charge of $348m (essentially same as 2H24 and 1H24).
3. Westpac: Credit impairment charge of $250m, up from $175m in 2H24 but down from $362m in 1H24.

Capital

1. ANZ: CET1 (Level 2) (Common Equity Tier One) is 11.78% (pro-forma, after completion of current buyback), $832m outstanding.
2. NAB: CET1 (Level 2) ratio of 12.13% (pro-forma). No current buyback.
3. Westpac: CET1 (Level 2) ratio of 11.99% (pro-forma, after completion of current buyback), $310m outstanding.

Return on equity

1. ANZ: 10.2% for 1H25 (up 0.94% on 2H24).
2. NAB: 11.7% for 1H25 (up 0.1% on FY24).
3. Westpac: 11.1% for 1H25 (down 0.3% on 2H24).

Dividend

1. ANZ: Interim dividend of 83c per share, same as 1H24 (interim) and 2H24 (final).
2. NAB: Interim dividend of 85c per share, up 1c on 1H24 (interim) but flat on 2H24 (final).
3. Westpac: Interim dividend of 76c per share, up 1c on 1H24 (interim) but flat on 2H24 (final).

What do the brokers say?

The major brokers are bearish on the banking sector. Within the sector, their picks are (very marginally) ANZ and Westpac.

The following tables list broker recommendations, target prices and forecast earnings for the 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:

1. ANZ is seen as having the least “downside” potential, with a consensus target price of $27.42, 5.4% lower than the last ASX price of $28.98. It has been the worst performing bank over the last 6 months, so this makes some sense. CBA has the most downside potential.
2. UBS prefers Westpac – thinks it is the most likely to surprise on the upside.
3. Morgans and Ord Minnett marginally prefer ANZ.
4. All the brokers feel that CBA is over-valued.
5. On earnings and multiples, ANZ and Westpac are the “cheapest”, followed by NAB and then CBA.
6. CBA at around 27 times earnings is at a material premium to the multiples for ANZ/Westpac/NAB which are around 13 to 16 times.
7. The brokers forecast that earnings (profit) in FY26 will be largely flat on FY25.
8. There is a sense that the banks are becoming more capital constrained. Further buybacks are off the agenda, and some analysts feel that marginal dividend cuts into FY26 are possible.
9. ANZ has the highest forecast dividend yield of 5.4%, although this is only expected to be partly franked (about 70%) and there is some concern that its dividend may be marginally reduced. CBA’s dividend yield is a paltry 2.9%.

Broker Recommendations and Target Prices

Source: FN Arena, Prices at 9 May 2025

Consensus Forecasts: Earnings, PE, Dividends and Yield

Source: FN Arena (prices at 9 May 2025)

What’s the bottom line?

As I said at the outset, I continue to maintain that the commercial banks (Macquarie excluded) are expensive. At best, bank shareholders can look forward to steady profits and dividends. A more probable scenario is an increase in bad debts combined with a fall in margins will erode any volume and productivity gains, leading to small declines in profitability and marginally reduced dividends.

Which bank do I like?

In terms of the individual banks, I think ANZ continues to look interesting. Firstly, it is the cheapest. Secondly, it has a new CEO starting (market expectations are low, so that’s a positive), and thirdly, the acquisition of Suncorp seems to be going well.

CBA continues to be super expensive, 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.

Which banks will I go for?

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 bank. However, within the sector I am going to stick to the barbell approach – the most expensive and the cheapest. I am going for CBA and ANZ.