Bank Earnings Results Previewed

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

 – Sluggish bank earnings growth expected
 – Some potential sources of upside exist
 – Brokers update expectations and orders of preference

By Chris Shaw

The major Australian banks kick off full year reporting season with ANZ Banking Group ((ANZ)) on October 25, following by National Australia Bank ((NAB)) on October 31 and Westpac ((WBC)) on November 5. Commonwealth Bank ((CBA)) has a different year end to the other majors (June) and so will only provide a 1Q13 trading update on November 7. 

In the view of Macquarie, the bank results will show sluggish earnings per share (EPS) growth of between minus one to plus one percent in half-on-half terms for the sector overall. This will reflect ongoing margin pressures, offset to some extent by reasonable cost outcomes.

For Macquarie, there is possible upside in the results from low quality sources. For ANZ this is likely to be the cost line, for National Bank the upside potential comes from better than expected bad debt outcomes and for Westpac the trading operations could surprise.

Given a weak earnings growth outlook Macquarie suggests outlook statements will again be critical, the expectation being all the banks will adopt a cautiously optimistic view on the Australian economy. This implies the banks indicating that comfortable operating capital positions are closer to being achieved.

Leading into the results, Citi has made minor changes to earnings estimates. These primarily reflect ongoing declines in net interest margins, as while comparables from the second half of FY11 were generally soft the relatively stable market conditions this half mean no material negatives with respect to markets income.

While margin expectations have been lowered, Morgan Stanley points out major bank earnings remain relatively defensive in the near-term and downside earnings risk is low relative to expectations. While funding costs have risen, this has been countered to some extent by loan repricing and expense growth is now being tightly controlled.

Loan losses remain the key swing factor but is currently tracking in line with expectations, while Morgan Stanley suggests as balance sheet pressures have eased funding risk has fallen and capital appears adequate across the major banks.

Retail banking is now the preferred exposure rather than business banking, this given the risk of higher impairment charges for weaker businesses in some industries. Consumer credit quality is proving more resilient, while home loan repricing supports retail banking revenue growth according to Morgan Stanley. There is also greater potential for cost savings within retail banking operations.

In terms of actual result expectations, Macquarie is forecasting ANZ to report cash earnings of $6,054 million and cash EPS of 218c. These results would be increases of 7.1% and 3.0% respectively in year-on-year terms.

For National Bank, the expectation of Macquarie is cash earnings of $5,664 million and cash EPS of 249c, up 3.7% and 0.5% respectively on a year-on-year basis. Westpac's result is expected to show cash earnings of $6,428 million and cash EPS of 204c, increases of 2.0% and 0.4% on a year-on-year basis.

By way of comparison, Citi's EPS forecasts for the banks stand at 214.9c for ANZ, 250.7c for National Bank and and 200.7c for Westpac, while consensus EPS forecasts according to the FNArena database stand at 219.5c for ANZ, 253c for National Bank and 205c for Westpac.

Looking at order of preference for the major banks, there is some variability among brokers. For example, recent price movements sees Citi list Commonwealth Bank as its top pick, followed by ANZ, National Bank and Westpac as number four. The first two are rated as Buy, the latter two as Hold.

Credit Suisse has almost exactly the opposite order, listing Westpac as its top pick given the expectation of a standout result relative to peers. Westpac is followed by ANZ, National Australia Bank and Commonwealth Bank, with Credit Suisse rating both Westpac and ANZ as Buy, National Bank as Neutral and Commonwealth Bank as Underperform. 

Morgan Stanley is different again, rating only Westpac as Overweight, while ascribing equal-weight ratings to Commonwealth and National Banks and an Underweight rating to ANZ. This is within an In-Line industry view.

The reasoning behind Morgan Stanley's order is Westpac provides greater confidence in terms of its margin and loan-loss outlook, while franchise performance is improving and the bank has a stronger capital and provisioning position than do its peers.

While National Bank trades on a discounted multiple relative to peers Morgan Stanley sees this as offset by slowing pre-provision profit momentum and rising loan losses in the business banking operations, while profit momentum for ANZ's institutional and Asian operations is also seen to be slowing and the stock appears fully valued around current levels. 

Of note, the FNArena database shows all four of the major banks are currently trading above consensus price targets, the premiums ranging from around 2% for ANZ to about 9% for Westpac. Sentiment Indicator readings stand at 0.5 for ANZ, 0.1 for National Bank, 0.0 for Westpac and minus 0.3 for CBA.

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