The interim earnings releases for Westpac, NAB and ANZ are now around two weeks away and analysts have started rubbing their crystal balls, with Westpac popping up in some as one to watch.
Westpac is first cab off the rank with its results out May 3, ANZ releases on May 5, NAB, May 6 and Macquarie releases its full year figures on May 7.
Not because its first to release but some analysts think Westpac will reveal cost cuts or rather a plan to chop costs over the next year or so.
Speculation about the Westpac result and possible cuts emerged as bank shares came under pressure yesterday (as did much of the wider market).
Fears about an upturn in Covid cases in Asia and parts of Europe (and a surprise case in New Zealand) worried investors.
But the bank shares got caught up in that weaker sentiment.
Westpac shares fell 1%, NAB shares were down 0.3% and ANZ lost 0.8%, while Commonwealth Bank shares bucked the trend to finish 0.5% higher.
Analysts say that after Westpac’s profits were hit last year by costs from a money-laundering scandal the bank is on track to boost its reputation by starting a cost-cutting campaign.
CEO Peter King flagged a “re-set” of the bank’s cost base at its most full year results in November and analysts reckon these will appear next month
Citi’s Brendan Sproules said in a note he believed the bank should slash its cost base of $10.2 billion to $8.8 billion in the next three years.
Hee argues Westpac could slash its branch network by 45% – closing 440 branches – and that risk and compliance spending will fall by $540 million over the next few years.
“The underperformance of the last 18 months has left WBC needing to provide hard commitments and quantifiable targets to close the gap to major bank peers,” Sproules claimed in his note to clients, ignoring the uproar that sacking staff and closing so many branches will cause.
His claim that Westpac will spend more on compliance costs goes against the intense oversight key regulator, APRA is maintaining over the bank (and over Macquarie for that matter)
Morgan Stanley’s Richard Wiles claims bank’s plan on costs will be a key influence on the bank’s share price in coming months.
He favours a scenario in which the bank gets its target cost base to $8.5 billion, excluding non-core businesses that are likely to be sold.
Wiles estimates such cost cutting would lift earnings forecasts for the bank by 5%
“Westpac will announce details of its ‘Cost Re-set’ plan at its first half 2020-21 result on Monday, May 3,” Mr Wiles said.
“This is an important catalyst because Westpac’s cost performance has been disappointing in recent years and we believe a credible medium-term cost reduction strategy is an important driver of the recovery in earnings, return on equity and dividends.”
Big calls, so let’s see what happens on May 3 and if Westpac can withstand the pressure if big cuts are revealed.
Earlier this month Fitch ratings upped its ratings on the big banks.
It lifted their outlook from negative to stable.
“Fitch Ratings’ revision of the Outlook to Stable from Negative on the ‘A+’ Long-Term Issuer Default Ratings (IDRs) of Australia’s four largest banking groups reflects a meaningful and sustainable improvement in the economic prospects in the banks’ core markets since the onset of Covid-19.
“This also points to less downside risk to the operating environment,” Fitch said.
“We expect Australian GDP to recover to end-2019 levels by mid-2021, and by 4.7% in 2021 following a 2.4% contraction in 2020.
“This outcome is much stronger than the 5% decline we had expected in April 2020, and we now believe that the operating environment will remain consistent with the current score even under a scenario that is weaker than our base case.
“The better-than-expected economic performance in 2020 and improved outlook for 2021 mean risks to asset quality have also eased, and we now expect performance to remain consistent with the current factor score of ‘A+’. We have revised the asset-quality outlook to stable from negative as a result,” Fitch said.
By the way, the CBA releases its third quarter trading update on May 12.
