Around mid-February is when the tone for the Australian stock market for 2014 will be set, that’s when the Commonwealth Bank (CBA) reveals its interim result and dividend, and we get the now usual first quarter updates from its peers the NAB, Westpac (WBC) and ANZ.
The CBA releases what’s expected to be a record interim result on February 14 – given the way the big four banks now dominate the market, the sentiment created by the report, and commentary on the rest of the year from management, will help tell us what sort of year investors will have.
Its rivals will release their first quarter trading updates around the time of the CBA report to the ASX.
That of course won’t be the only factor – China’s health (confirmed by the latest growth figures for the final quarter of 2014 and all of last year), domestic political/economic considerations centred on the Commission of Audit and the May Federal budget, and iron ore prices – are some of the other important influences, along with the value of the Aussie dollar.
But judging by the way the big four drove the market in 2013, their interim and full year reports this year, plus the commentaries from management, will be vital to maintaining market confidence, or explaining any weakening after their report.
The banks’ domination of the ASX in 2013 was underlined by their record breaking performances as they picked up higher business levels from the emerging boom in new and existing home sales and construction, and continued to ride falling bad and doubtful debt provisions and impairment charges.
The Big 4 In 2013 – What for the banks in 2014? Watch the CBA’s interim next month
The Commonwealth rose 25.1% to $77.80 at the end of December, while Westpac climbed 24.1% to $32.38 and the ANZ rose 28.5% to $32.23. All hit new highs in the six months to December. The National Australia Bank was the only one of the big four not to hit a record high in the second half of 2013, but did best of all, jumping 39.4% to $34.83. That was still the NAB’s highest price since 2007.
Since then they have fallen by around 4-6% in the first three weeks of this year. Why? Well, the 2013 finals or interims have been paid and in the system, market depth and volumes have been light because of the holiday periods around the world (ours lasts until next week and the Australia Day holiday on Monday). That all means increased volatility and biggish price swings.
The CBA closed at $75.32 yesterday, the NAB was down at $33.64, the ANZ was lower at $30.87 and Westpac eased to end at $312.53. All fell by less than 16c, which was not significant.
The big four easily outperformed the wider market in 2013 which saw the main indicator, the ASX 200 rise 15.1%, beating the 14.6% rise in 2012.
Just on that comparison, it’s hard to see the banks repeating 2013’s effort this year because the outlook for the economy and business generally seems weaker than a year ago. But the ability of the banks to surprise on the upside has been confirmed a number of times in the past three years, so another solid year can’t be discounted.
Goldman Sachs analysts though remain believers in the banks. They said yesterday in a client note that they expect the Australian banks will continue to benefit from low bad debts and a recovery in credit growth over the coming year.
But after the sector’s blockbuster share price increases of last year, the investment bank pointed out that valuations were "stretched" which in turn pointed to weaker price growth for the year.
With a housing market recovery tipped to drive stronger borrowing in 2014, Goldman analysts led by Andrew Lyons forecast 6.4% bank cash profits for 2014.
Some 60-70% of that growth should flow to shareholders via higher dividends, even though the banks have to boost capital ahead of the new rules starting next year.
By the end of 2013 the big four banks accounted for around 24% of the total value of the market, which is why their importance to this year’s overall performance simply can’t be under-estimated.
But there is a high level of scepticism about the banks outlook for 2014.
For example Fitch Ratings warned earlier this month that the weaker outlook for the economy meant "a more challenging environment" was confronting the banks.
“Profit growth is likely to be modest at best – due to higher impairment charges and net interest margin pressure from strong loan competition, partially offset by moderately higher credit growth and a reduction in funding costs,” said the report.
“Cost management should remain a key focus for the Australian banks. Wealth management and measured expansion into Asia provides earnings diversification for the larger banks."
But the Fitch report said these challenges were manageable with strengthening funding positions offsetting a slight deterioration in asset quality as the Australian economy adjusted to a post-mining boom future.
Fitch warned that “Household leverage remains high, although declining modestly, leaving bank asset quality somewhat vulnerable to a significant rise in unemployment and/or higher interest rates.
“Commercial loans have continued to perform well despite continued weakness in some non-mining industries. Banks’ credit exposure remains well diversified by industry and single names.
“It is likely that some small- to mid-sized mining contractors will come under some pressure as mining investment starts to subside, while it is possible defaults will start to emerge in non-mining sectors as businesses continue to grapple with subdued conditions,” the report said.
The Commonwealth will report a very solid interim result (because it will contain the September quarter that the bank has already pointed out was very solid, a point confirmed by the way the other banks performed in the same quarter.
The CBA said in November that its unaudited cash earnings for September quarter were approximately $2.1 billion. Statutory net profit on an unaudited basis for the same period was also approximately $2.1 billion, with non-cash items treated on a consistent basis to prior periods.
The bank said this was due to "A combination of solid revenue growth and cost discipline resulted in positive “jaws” in the quarter; Group Net Interest Margin was marginally lower than the prior half, reflecting deposit margin compression in a lower interest rate environment and Trading income remained at relatively strong levels".
"System mortgage credit growth was modest, with the Group growing slightly ahead of system. Whilst lower interest rates have supported strong growth in new business activity compared to the prior year, this has been balanced by higher levels of loan repayments.
"Commercial lending growth reflected low system credit growth in the quarter; Household deposit growth remained strong and broadly in line with system.
"The New Zealand economy continued to show signs of improvement, with a stronger household sector underpinning a broad-based expansion in activity. ASB recorded solid growth in both customer advances and deposits in the quarter. Whilst retail deposit margins improved, lending margins remained under pressure in a competitive market," the bank added.
The tone of those comments were seen as bullish and the bank’s shares finished 2013 with a solid rush, as did the others.
The CBA will be looking to top the $3.780 billion cash profit earned in the first half of the 2013 financial year – that was up 6%. Based on the September quarter performance, the bank is well on its way to topping $4 billion for the six months to December 31, which points to an $8 billion plus full year, all things being OK in the economy and the sector.
Interim dividend was $1.64 – shareholders should look for modest increase in that payment in February. The CBA has a payout target of 70% of earnings.
