Analysts are tipping bank earnings to fall despite strong revenue momentum from widening loan margins courtesy of the central bank’s interest rate cuts.
Analysis conducted by Goldman Sachs JBWere, UBS, Credit Suisse, Citigroup and Bank of America – Merrill Lynch showed Westpac is likely to be the standout bank when the sector reports its interim results over the next week.
The NAB reports Tuesday, the ANZ Wednesday and Westpac on May 6.
But the most important result will be the full year figures for Macquarie on Friday. It is the most speculated upon bank in the country.
Goldman Sachs said: it expected Macquarie’s FY09 cash earnings to be around ”$1,104m, versus management guidance of $900m and consensus of $918m.”
The results will confirm more write-downs, but should continue to show the underlying strength of the bank and its strongly liquid balance sheet.
The four brokers estimated that Westpac’s cash earnings will rise 25% to around $2.303 billion, thanks mostly to the purchase last year of St George for $16.1 billion in shares.
The National Australia Bank’s (NAB) cash earnings are forecast to drop by 16% to around $2.408 billion, while the ANZ’s cash earnings are expected to be down by around 27% to $1.21 billion.
Average first half EPS across the four brokers puts NAB’s at 111.45 cents, ANZ’s at 57.3 cents, and Westpac’s at 86.4 cents.
Merrills said Westpac’s interim dividend was likely to be down 13%.
The ANZ and NAB have already revealed 2009 dividend cuts of 25%.
UBS says wider margins, strong volume growth in loans and deposits and surging revenue growth from their markets division proprietary trading services have added an average 10 basis points to margins for the big four over the past six months.
UBS believes Westpac boosted its earnings by a tripling in margins to 19 basis points(0.19%), while the repricing of ANZ’s corporate loan book has doubled its margins to seven basis points.
Higher bad debts and commercial property impairment costs for NAB’s struggling British subsidiaries are expected to be a heavy drag on its margins.
And ANZ’s revenue will suffer from big losses from its exposure to $US10.9 billion ($A16.86 billion) worth of credit intermediation trades with US monoline insurers such as which have been badly hurt by the credit crunch.
Attention will be on bad debt provisions and loan delinquencies at the three banks, as the bad debt cycle moves deeper into the nastier stage of rising problem loans, especially in commercial property and corporates.
Bad debt charges are expected to rise to an average of 66 basis points to total loans as the bad debt cycle progresses from big name corporate failures to small-to medium-size enterprises.
But the big question is whether the banks’ previously revealed boosts to bad debt provisions will be enough to offset rising bad debts. All banks have tucked a bit more away for future rises in bad debts.
With unemployment set to rise, the big question for some analysts is whether there will be a noticeable rise in mortgage bad debts.
The 6-12 month holiday promised by the big four for customers losing their jobs or facing trouble meeting mortgage payments will mean arrears won’t grow sharply for a while if there’s a rise in jobless numbers over the next year.
NAB and ANZ made provisions running north of $800 million to cover the first three to four months of 2008-09 and Westpac made first quarter provisions of $630 million, partially on exposures to Babcock and Brown, Allco Finance and ABC Learning Centres.
Analysts expect loan delinquencies among consumers are expected to edge higher in line with rising unemployment, especially in New Zealand, which has been problematic for all banks and caused ANZ to flag a doubling in its full year 2009 provision to $NZ570 million.
The brokers expect Westpac to have the lowest cost-to-income ratio at between 37 and 39% because of cost synergies from last year’s St George Bank merger and the ANZ the highest at around 50.7%..
On the NAB Goldman Sachs said Friday that investors should look at the UK, where the bank sector has been flattened by bad loans, bank failures and rapidly rising unemployment, and at costs and loan growth.
"UK – whilst signs of a significant slow down in the UK business, coupled with large increases in provisions are somewhat expected, accelerating bad news from the UK business is likely to see the stock underperform.
"Any large acceleration in underlying provisions expense (excluding for large exposures) will see the stock underperform.
With a focus around increases in provisions relating to the UK portfolio, Commercial property, large exposures and any acceleration in underlying provisions.
"We expect NAB’s pre-provisions performance to see positive benefits from margin expansion, as well as below-peer cost growth."
"We are currently forecasting ~1% growth pcp. Recent APRA data shows loan growth will remain sub peers. This could offset some of the relative benefits of the above-mentioned below-peer cost growth.
On the ANZ, Citi said last week:
"While this result has been relatively well flagged, successive updates put slightly different perspectives on its likely quality."
Citi said the keydrivers of this result will be: "Revenue growth will be less than peers due to the size of the mark-to-market losses recognised on credit intermediation trades (~$500m pre-tax). Core trends on net interest margins (up 4bps hoh) and strength in markets related revenues should be consistent with underlying trends at peer banks.
"But expense growth will likely
