Aussie Banks: an update post-results
5 Nov, 2020 |
READ TIME 4 mins
Rod Skellet
Equities Investment Strategist

Over the past two weeks we have seen three of the four major banks – NAB, ANZ and Westpac – report their second half results for 2020.

The environment in which these results have been released has been unusual, as we have seen the traditional economic data (that would normally push earnings one way or another) significantly dampened by the impact of the actions of the Federal Government.

What does the data show? 

When we look at what macro data really impacts banking revenue, one key driver is employment – or unemployment in this case. COVID-19 has hit the small to medium enterprises hard, with the seasonally adjusted unemployment rate jumping from 5.2% in September 2019 to 6.9% for 2020. According to UBS, this has manifested into the government providing some economic benefit to almost half the population – through wage subsidies, unemployment benefits or being directly employed by the government.

Victoria, which is normally responsible for 23.6% of Australia’s GDP, has only just emerged from one of the longest lockdowns globally – given that hit to economic performance nationally, the real economic environment that the big four banks are operating in, can only be described a surreal.

The major banks were also implementing changes as a result of the Hayne Royal commission, which resulted in increased cost bases even before COVID-19 struck. We then add to this the costs associated with COVID-19, being the impairment charges and customer remediation charges (largely a result of deferred home loans), the last two quarters have seen the banks’ revenue, profits and dividends all crushed.

So how have the banks faired?

National Australia Bank (NAB:ASX)

NAB’s result is due to be released today, but in the meantime, they have announced a further $450m in wealth & employee provisions and property impairments. The sale of MLC to IOOF will rid the bank of this loss-making provision going forward, but that has not stopped brokers with cutting dividend forecasts to circa 30 cents per share, which represents a 46% payout ratio. EPS forecasts will be closely watched, with analysts unlikely to adjust FY21E until the economy improves. Net Interest Margin (NIM) for NAB is expected to contract 4bp from 1.79% to 1.75% – while the reduction in loan deferrals will another area that the markets seeks significant improvement.

ANZ Banking Group (ANZ:ASX)

In FY20, ANZ saw a 42% drop in cash NPAT to $3,758m and a dividend of 35 cents per share (as compared to 80c this time last year), which was in line with expectations. Credit impairments of $2.74bn hurt, while NIM fell 12bp to 1.57% due to low rates and asset & deposit mix. Encouragingly, 79% of mortgages and 86% of SMEs reached the end of their loan deferral period and have reverted back to full payment. Clearly the stable housing market and low rates (along with Federal Government employment support) has bought enough time for customers to get back on their feet.

A customer remediation charge of $188m relating to an acceleration of remediation programs and product reviews across the group, emanating from the Royal Commission had been pre-released to the market. In a blow to the coal sector, ANZ will stop lending money to “new Customers” that earn more than 10% of their revenue from thermal coal mining or generation.

Like all four big banks, ANZ capital position is strong with a CET1 sitting at 11.34%. If a domestic economic recovery emerges through 2021, ANZ’s earnings should recover with improved credit growth. Trading at 0.9x book value ANZ’s share price is nicely placed to improve and both JPMorgan and UBS have overweight or buy recommendations.

Westpac (WBC:ASX)

The sooner 2020 is over for Westpac’s management and shareholders, the better.

FY20 cash profit of $2,608m down 62% on 2019 and a final dividend of 31 cents per share. Key impacts were credit provision build, AUSTRAC fines, remediation charges and write downs. The worst of COVID-19 loan deferrals seem to be past with deferred mortgages down 70% or 4% of book and deferred SME loans down 90% to 2% of book.

Westpac’s costs are trending up, which is not good, and the outlook is not improving, with risk and compliance investment post Royal Commission rising from $278m in FY16 to $806m in 2020.

WBC should be investing in technology, growth and productivity to prevent the bank from falling behind peers, but instead it must balance that knife edge of ensuring it adheres with compliance and customer remediation, while developing a productive and efficient platform going forward.

The outlook for Westpac is very much driven by the domestic economic outlook.

Valuation-wise, it is trading at 0.9x book according to JPMorgan, its balance sheet is robust with a CET1 ratio of 11.13%, and they have taken significant provisions to date which puts it in a strong position to rerate if the economy improves.

UBS View
Bank CBA NAB WBC ANZ
Current Share price (as at 2pm AEDT 4th Nov 2020) 68.39 18.73 17.36 19.30
Target Price 72.00 20.50 20.50 21.00
Upside/Downside 5% 9% 18% 9%
Price to Book ratio 1.70 1.00 0.90 0.80
JPM View
Bank CBA NAB WBC ANZ
Current Share price (as at 2pm AEDT 4th Nov 2020) 68.39 18.73 17.36 19.30
Target Price 66.30 20.90 18.10 20.30
Upside/Downside -3% 254% 282% 244%
Price to Book ratio 1.70 1.20 0.90 0.90

To wrap up the state of the banks

The banks have had a tough year, and all are looking forward to a rebuild in the Australian economy. The regulatory environment will see them all focusing internally to ensure the sins of the past do not come back to haunt their cost base.

The shape of the yield curve, with a lower for longer interest rate environment, is a structural impasse that could inhibit NIM expansion over the next 12 to 36 months.

Outside of employment, credit growth (growing their loan book with more profitable loans) will depend on an improving domestic housing market and construction activity.

The government is doing something to help in this regard, but is it enough?

2021 will be a very interesting year for the big four banks, and the current valuations may prove to be an attractive entry point if Australia’s economy can recover in a timely manner.

The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.

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