A testing week next week for local investors with three of the big four banks down to report in Westpac, the ANZ and NAB, and Macquarie to end the week with its full year earnings.
Westpac starts the reporting season on Monday, followed by ANZ on Tuesday (the same day as the federal budget) National Australia Bank on Thursday and Macquarie on Friday. The Commonwealth is due to provide a third quarter trading update on Monday, May 9.
Of the quartet, Macquarie we know will report a solid profit, topping $2 billion – a record – even though it experienced a slowing rate of growth in the six months toMarch 31 as global markets became more jittery.
The bank said in March that it still expects its second half net profit to beat the $926 million earned in the same period a year ago, despite a mixed performance among its businesses.
Macquarie made a profit of $1.07 billion in the first half to September 30, meaning it is well placed to exceed its 2008 record profit of $1.8 billion in the year to March 31.
In fact the actual result won’t be of interest, it will be the outlook for the September 30 half year, which on what we have seen so far from its rivals on wall Street and in Europe, will be lower than the previous quarter. News that it had sacked 15% of its US funds management staff gives us an idea of how tough it is for Macquarie and its rivals at the moment and how tough it will be to match last year’s record.
Macquarie shares are down 19% so far in 2016 as investors take a sceptical view about its 2016-17 performance.
Looking at the others, UBS banking analyst Jonathan Mott said this week that with the unemployment rate falling and interest rates remaining low, stressed and non-performing loans should remain close to their lows which should provide the banks with confidence to maintain payouts to shareholders. “We expect the banks to look through the spike in bad and doubtful debt changes and hold dividends,” Mr Mott said this week in an article In Fairfax Media. UBS predicts Westpac to lift its interim dividend 95 cents (from 93 cents in the same period of 2015) and for ANZ and NAB to keep their interim dividends flat at 86 and 99 cents respectively.
Westpac reported cash earnings of $3.778 billion for the March, 2015 half year, The NAB earned $3.332 billion and the ANZ earned $3.7 billion. They will all fall well short of the Commonwealth’s $4.8 billion cash interim reported in February.
But the big issue for investors will be the level of bad debts and any increase, along with the trend in impaired assets. Despite analyst attempts to claim the banks will ‘look through’ these figures, investors think differently, hence the weakness in bank shares since the ANZ surprised with a sharp upgrade (followed by a second upgrade).
The ANZ will report an increase in bad and impaired assets of close to if not more than $1 billion, about double the $510 billion for the March, 2015 half year.
The failures of Arrium, problems at Clive Palmer’s Queensland Nickel, Slate and Gordon, McAleese, Dick Smith and a host of smaller unlisted groups in and around the resource sector, are seen as driven the rise in bank bad debts and loan impairments.
Unlike the interim result season last year, analysts aren’t expecting the banks to look to equity capital market raisings to boost capital. They still don’t know what the regulators will demand in new regulations due out later this year.
The CBA shares are down 12,6% so far this year and nearly 20% in the past 12 months, the ANZ is down 13.2% this year so far, and a third in the past 12 months, NAB shares are off 6.6% so far in 2016, but 26% over the past year, while Westpac share are only off 6.2% this year, but nearly 19% in the last 12 months.
Low increases (but credible) in impaired assets could signal a rebound in bank shares, but don’t depend on it. The moves by Westpac, the Commonwealth and ANZ to stop funding property purchases by foreign buyers has the capacity to trigger a earnings slide in the next year.
