For many self managed super fund (SMSF) investors, the full-year reporting season does not finish at the end of August – they have to wait for Westpac, ANZ and NAB to report.
This trio is off-kilter with Commonwealth Bank, which has a June 30 balance date: their financial years end on 30 September, and they report in November.
Leading into the final days of the financial year 2013-14, the September trio will be under pressure to match the effort of CBA, which delivered a record cash profit of $8.68 billion, up 12%, but in-line with analysts’ consensus expectations. The bank lifted its full-year dividend by 10%. CBA’s result was boosted by a strong performance from the retail bank, and further reductions in bad debts.
The half way mark
At the March 2014 half-year, the tale of the tape for the September trio looked like this:
Westpac lifted interim revenue by 6.8% to $9.79 billion and boosted cash profit by 8% to $3.77 billion, ahead of consensus expectation, at $3.64 billion (banking analysts prefer to focus on the cash profit measure, because it strips out one-off items.) The interim dividend was lifted by 4 cents, or 5%, to 90 cents a share. Net profit was up 10.2% at $3.62 billion.
NAB’s cash profit rose 8.5% to $3.2 billion, and net profit was up 15.8% to $2.9 billion over the six months to the end of March. However, the bank only lifted cash revenue by 2.6%, to $9.49 billion: this number would actually have decreased by 1.2% if foreign exchanges were excluded. The interim dividend was lifted by 6 cents, or 6.5%, to 99 cents: this was not only a record high interim dividend but an all-time high for a six-month period.
ANZ posted an 11% increase in cash earnings, to a record $3.5 billion, ahead of the consensus forecast, with the statutory net profit up 15% to $3.4 billion. Revenue rose by 7% to $9.52 billion, and provisions for bad and doubtful debts were down 12%, to $528 million. The interim dividend jumped 10 cents, or 14%, to 83 cents a share. Profits from the Asian business rose by 43%.
Cause for caution?
Underneath the headline rises in profit and dividends, there were some issues that may limit capital growth.
NAB’s main source of profit, the net interest margin (the gap between the rates at which it borrows and the rates at which it lends) was down 9 basis points (0.09%) year on year, to 1.94%. That meant that profit growth was driven by a 52% fall in the provision for bad and doubtful debts, compared to the same period last year.
While ANZ made great play of the improvement in the Asian business – its key differentiating asset – the bank’s net interest margin fell to just 2.15%, and the amount of tier one capital also fell. Moreover, the Australian business saw a 5% fall in cash earnings, to $2.02 billion.
Westpac, too, saw the net interest margin decline, by 8 basis points to 2.11%. Bad debt charges fell by $97 million, boosting profit.
So, leading in to the end of the trio’s financial years, we know that competition in the mortgage space remains strong, which is showing up in net interest margins, which fell by an average of six basis points, to 2.08%, during the half year. Credit growth remains tepid, and the banks can only look back at pre-GFC annual loan growth rates of 12%-plus wistfully, not necessarily a bad thing for consumers.
From January 2016, under the Basel III regulations, the big four banks will be required to lift their Common Equity Tier 1 (CET1) capital held from 7% to 8%, because they are deemed “systematically important” to the Australian banking system. (A higher proportion of CET1 capital means a lower risk of default: an example of CET1 capital is ordinary shareholder equity.)
The big four banks will certainly be able to meet this capital requirement – if they do not already – but it may impact their payout ratios going forward.
The FY14 results will likely be strong, judging from Commonwealth Bank’s earlier effort. But it’s the future that investors need to keep an eye on.
Here is what the market (analysts’ consensus forecasts) expect for FY14 for the September 30 trio:
FY14 Earnings per share 254.4 cents, up 10%
FY14 Dividend per share 176.4 cents, up 7.5%
FY14 forecast yield: 5.5%
FY15 Earnings per share 266.3 cents, up 4.7%
FY15 Dividend per share 184.5 cents, up 4.6%
FY15 forecast yield: 5.8%
FY14 Earnings per share 258.3 cents, up 12.5%
FY14 Dividend per share 199.6 cents, up 5.1%
FY14 forecast yield: 5.9%
FY15 Earnings per share 279.3 cents, up 8.1%
FY15 Dividend per share 209.1 cents, up 4.8%
FY15 forecast yield: 6.2%
FY14 Earnings per share 240.2 cents, up 9%
FY14 Dividend per share 183.3 cents, up 5.3%
FY14 forecast yield: 5.5%
FY15 Earnings per share 247.8 cents, up 3.2%
FY15 Dividend per share 192.9 cents, up 5.3%
FY15 forecast yield: 5.8%
And here are the expectations for Commonwealth Bank:
FY15 Earnings per share 547.5 cents, up 2.6%
FY15 Dividend per share 422.9 cents, up 5.5%
FY15 forecast yield: 5.4%
FY16 Earnings per share 566.7 cents, up 3.5%
FY16 Dividend per share 439 cents, up 3.8%
FY16 forecast yield: 5.6%
It is clear from those numbers that growth expectations are tailing off. At present, the banks are fully priced as a sector, and are being supported by their dividend yields, and, in particular, the appetite for income from SMSFs. They’re not going to stop paying dividends anytime soon, so it’s no time to sell, and there maybe opportunities to buy if the market dips lower.
The big four remain a strongly profitable oligopoly and sound income source, even if they don’t appear to be screaming buys on a capital-growth basis at this point. And when the Australian dollar starts to fall, as the greenback rises, don’t be surprised to see foreign investors piling back in (see Peter’s article for why foreign investors will return).
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.