Three of the big four banks – ANZ, NAB and Westpac (WBC) rule off their 2013-14 accounts tonight and the next six weeks or so before they report are likely to be fraught for shareholders large and small, if the past month has been any guide.
Just take yesterday – another big sell off on the ASX, driven by the weakening share prices of the big four banks.
In fact yesterday saw the NAB joint Westpac, the Commonwealth (CBA) and the ANZ in moving into a price correction fall of 10% or more from their previous peaks – this time in April.
All four stocks are now down for the year so far.
In fact the CBA is down 4.3% for the year so far, the ANZ has lost 5.2%, the NAB has lost 7.9% and Westpac is down 2.2%, making it the outperformer this year (in relative terms). But not on its slump in September.
The ASX 200 index finished sharply lower, falling 49.2 points, or 0.9%, to a fresh seven-month low of 5264.2 points. The index has lost 6.4% in September and is down 1.6% since the beginning of the year.
The All Ordinaries Index shed 47 points, or 0.9%, to 5269.6 points.
The big banks all fell with the Commonwealth Bank down 1.1% to $74.43. The ANZ and Westpac lost 1.5% and 0.8% to $30.53 and $31.65 respectively.
And the NAB shed 1.9% to $32.07, becoming the last of the big four banks to fall into a technical correction, down more than 10 per cent from its 2014 high in late April.
But in the year to yesterday, three of the four banks have fallen (NAB down 6.5%, Westpac, 3.1% and the ANZ down 0.8%), but the Commonwealth is still up 4.6%, pointing to its relative resilience.
Most of the losses in the shares of the big banks occurred in September.
Westpac is down nearly 10% since in September alone, the NAB has fallen nearly 9%, while ANZ is down around 8.3% and the CBA is off 7.8%, since the start of the month.
Big banks head toward offical correction
A fall in the value of the dollar (down 7.5% in the past month) helped hit confidence, but a weaker dollar should be good news for exporters and tourism groups – but not importers and retailers.
The bank face higher repayment costs for their surge in offshore borrowings in recent months, and if the fall in the currency is sustained, it will add further pressure to the already strained profit outlook for 2014-15.
As the Reserve Bank pointed out a fortnight ago in its Financial Stability Review
"The reduction in the major banks’ aggregate cost-to-income ratio has been an offset to the decline in their net interest margin over the past couple of decades. However, given the relatively low level of this measure of operational efficiency, there is a question as to how much the major banks’ costs can be further contained in future without their risk management capabilities or controls being affected. “
"The major banks’ annual return on equity is expected to be 15 per cent in their 2014 financial year, similar to the average return they recorded over the 2010–13 period,” the RBA said.
But from tomorrow onwards, it could be a very much tougher period.
Besides the weaker dollar, the pressures on their cost to income ratios (especially from weakening income growth) there’s the looming crackdown on home lending, especially to investors, will also add further pressure to the revenue and income streams for the big four over the next year or two.
The CBA earned a record $8.68 billion in the year to June and none of its rivals will come close. The NAB and the ANZ both produced solid quarterly updates for the three months to June (Westpac doesn’t give quarterly updates).
Usually the banks’ shares take a bit of a hit in the run up to the reporting season – but the falls in September have been larger than normal, and earlier than usual – the price weakness usually appears a month to six weeks before the results emerge in late November,
And the RBA’s Review pointed out that the banks’ earnings will slow in the next two years, according to analysts;
"Looking ahead, equity analysts are forecasting the major banks’ profit growth to moderate, to 9 per cent in 2015 and 5 per cent in 2016. This is partly because bad and doubtful debt charges are now at low levels and will no longer provide the impetus to profit growth that they have in recent years. In addition, analysts expect the major banks’ net interest margins to compress further, mainly due to competition in lending markets.”
If that’s the case, dividend growth will slow, especially in bank bad debts start rising (in housing or commercial property?).
