The ANZ yesterday settled a rate rigging case with ASIC ahead of the release of its full year financial figures on Thursday.
The settlement news was something of a surprise as there was no sign of it in reports in Monday morning newspapers and online. Some media reports claimed the cost will be around $50 million, but there was no comment on that from the parties to the case, nor on whether the bank had made any admissions.
Media and analysts will have a chance to probe further on Thursday, but the ANZ is likely to try and avoid any direct comment.
ANZ shares were higher earlier on but fell as the wider market dropped in afternoon trading. They ended at $30.54, down 0.16%.
Analysts have started releasing estimates of the big three reporting banks (Westpac and the NAB) besides the ANZ. As we reported yesterday the ANZ net profit will be around $7 billion, while analysts say the NAB’s figure will by around $6.6 billion and Westpac around $8 billion. The Commonwealth has already reported net earnings of nearly $10 billion for the June 30 year.
All up the analysts reckon the big four will earn around $31 billion in 2016-17. The big imponderable for earnings will be the early impact of the Federal bank profits levy and the impact of asset sales (by the NAB, ANZ and Westpac especially) and how they are accounted for an final figures on profits or losses on those sales.
Collectively the big four saw cash profits drop 2.6% in 2015-16 to $29.8 billion, thanks in part to around $1 billion in losses and write downs by the ANZ as the new management sold Asian assets and it was hit by bad debts and asset impairments in some areas of its loan book.
2014-15 saw the four big banks earn $30.6 billion, so a figure this year around $31 billion will be a sign of the strains the banks are remain under as they lift rates for interest-only loans, but are forced to sock away more capital to meet regulatory demands for them to be unquestionably stronger.
That in turn means the big four banks won’t move their final dividends higher and all will run their dividend reinvestment programs to raise more easy capital without resorting to approaches to shareholders via placements or cash issues.
Argo Investments is one of the bigger investors in the big four and CEO Jason Beddow told the investors AGM in Adelaide yesterday his company thinks that despite what he called “some well-publicised headwinds” the four majors “are likely to deliver solid results over the next 2 weeks.”
“The recent strength in the Australian dollar may hamper companies with substantial offshore earnings, however we expect the domestic economy will continue to grow, with unemployment relatively low and interest rates at historical lows.
“We are wary of what appears to be an overstretched consumer at a time of high household debt levels and increasing costs of living, including the surge in energy prices,”he cautioned.
UBS analyst Jonathan Mott said in a client note over the weekend this year’s rises in interest-only home loan rates will help the big three to report growth in earnings.
"We expect solid, relatively clean results to be delivered as they benefit from favourable economic conditions, mortgage repricing and super-low BDD [bad and doubtful debt] charges," Mr Mott wrote in his note to clients.
The Reserve Bank said earlier this month that the banks had continued to attract strong deposit flows despite paying lower rates on deposits, and the “spreads” that wholesale credit markets charge for risk had “narrowed considerably”.
"Recent loan repricing and reduced funding costs are expected to drive some increase in the net interest margin, leading to higher income growth and profits," the RBA said in its Financial Stability Review.
But the central bank cautioned against over-expectations about bank profits and performance.
“Profits remained high in the latest period, but there has been very little growth since 2014, both in headline and underlying terms. One reason for the lack of profit growth is that banks have divested wealth management and life insurance operations; another is that their net interest margins have compressed, partly reflecting increased holdings of low-yielding, high-quality liquid assets. In addition, while charges for bad and doubtful debts remain around historically low levels, they are no longer falling and so are not adding to profits as they did prior to 2014,” the Bank said.
"Analysts expect profits to increase over the coming year. Recent loan repricing and reduced funding costs are expected to drive some increase in the net interest margin, leading to higher income growth and profits.
"The share prices of Australian banks have declined over the past six months, underperforming global peers. The price fall has seen banks’ forward earnings yields – a proxy for investors’ expected rate of return – rise both in absolute terms and relative to the broader market. Banks’ current forward earnings yields are around their pre-crisis average, despite a large decline in risk-free rates since then.”
In other words, there are rising risks that the banks may be over-priced, especially if there are any disappointments in the three reports and the Commonwealth’s trading update and AGM next month where the money laundering claims from Austrac will be front and centre.
