A big week for the local market and investors lies ahead of us – not from what happens offshore (and yes, the Fed’s post meeting statement early Thursday morning and US market reaction will be vital, no doubt).
But in terms of local investor sentiment, the new earnings figures from a trio of major banks will do a lot to condition market confidence until the end of the year.
The biggest drivers of local market growth (and falls recently), sees the four big banks release final year, interim or trading updates over the next couple of weeks, starting on Thursday.
A few hours after the Fed issues its statement early Thursday, which could contain a firming up of thinking on the timing of interest rates moves in 2015, the National Australia Bank reports what will be a lower annual profit after the update earlier this month and around $1.3 billion in write downs and losses.
And then a day later, the ANZ reports its full year result, while Macquarie releases its interim result (which is expected to be solid, thanks to the upsurge in market volatility).
Then today week, Westpac reports its full year figures. Westpac didn’t release a third quarter update, so it’s a big imponderable so far as analysts and investors are concerned, but that’s for next week.
The Commonwealth holds its AGM on November 12 when the first quarter update is expected to be released.
Later today Bendigo and Adelaide Bank holds its 2014 AGM and is expected to issue a trading update.
Global bank sentiment will be impacted in stockmarkets from today in the wake of the results of the latest stress tests on 137 big European banks.
Our four big banks have been the main drivers of the local market in the past two years, although September saw a sell-off amid doubts about their longer term performance.
But in the rally from earlier this month, the prices of the big four are up around more than 5% on average.
Last week, the National Australia Bank rose 3.4% to $34.27 at the close on Friday, the ANZ added 3.4% to $33.02, Westpac Banking Corporation also gained 3.4% to end on $34.21, while the Commonwealth added 2.9% to $78.77.
But as we head towards the reporting season, it will pay to remember what the Reserve Bank said in its recent Financial Stability report about the banks, the bad debts and the profit outlook.
The points to look for will be whether the banks use of lower bad debt impairment and write-offs has ended, with rises appearing in the accounts (as it did for the Commonwealth in the second half). Revenue growth, especially outside housing, and dividends will of course be in focus.
Here’s what the RBA had to say about the earnings outlook (and look at where their bad debts are occurring and note the appearance of mining services, as we have seen with recent earnings downgrades).
"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.
"Asset performance is a key indicator of Australian banks’ soundness and therefore a focus of financial stability analysis. Over the first half of 2014, the asset performance of Australian banks continued its steady improvement of recent years.
"In the banks’ domestic portfolio, the ratio of non-performing assets to total loans was 1.1 per cent at June 2014, compared with a peak of 1.9 per cent in mid 2010.
"This decline mostly reflects a reduction in the share of loans classified as impaired (those not well secured and with repayments doubtful), while the share of loans classified as past due (in arrears but well secured) has fallen modestly since its peak in 2011.
"The reduction in banks’ domestic impaired assets since 2008–09 has been concentrated in business loans, in particular commercial property loans. The strong recovery in commercial property prices induced another sharp fall in the level of impaired commercial property loans over the first half of 2014; the corresponding impairment ratio fell a little below that for other business exposures.
"Further improvement in business loan performance will likely depend more on how other industries perform; notably, the impairment ratio remains elevated in the agriculture, fishery, forestry & mining category, which accounts for 15 per cent of the major banks’ business lending.
"The decline in banks’ impaired business assets over recent years suggests that the risk profile of their business loan portfolios has improved. One indicator of this is the share of corporate exposures that are assessed to have a relatively high probability of defaulting in the following year. (Probabilities of default (PDs) are derived from the internal credit risk models of those banks authorised by APRA to use these models to calculate their minimum regulatory capital requirement.)
"The share of the major banks’ corporate exposures assigned a PD of 0.5 per cent or greater declined noticeably over the four years to June 2014. Some of this decline would have resulted from better macroeconomic and property market conditions.
"The underlying quality of banks’ business loan portfolios should also have strengthened given the tightening in business lending standards around 2008–09, thus increasing the resiliency of these portfolios to possible future adverse macroeconomic circumstances.
“However…, it will be important for banks’ future loan performance that these gains are not compromised by an imprudent loosening of business lending standards from their current configuration, especially given that the bulk of bank credit losses in Australia have historically occurred in business lending.
"The major banks’ aggregate charge for bad and doubtful debts fell by 17 per cent in their latest half-yearly results and, for the 2014 financial year as a whole, it is expected to decline to a historically low level as a share of assets (Graph 2.13). Aggregate profit of the major banks was a little over $14 billion in their latest half-yearly results, an increase of around 13 per cent on the corresponding period a year earlier.
"In addition to lower bad and doubtful debt charges, profit growth was supported by higher net interest income: stronger growth in interest-earning assets more than offset a small decline in the aggregate net interest margin arising from strong competition in lending markets. After declining in 2013, operating expenses increased over the year to the latest half, reflecting higher staff and investment-related costs.
"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.
