ANZ Grows While Westpac Stalls

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

By Greg Peel

It was near two weeks ago when I last updated the banking sector following a third quarter update from National Bank ((NAB)) and a full-year result from Commonwealth Bank ((CBA)). (See Bank Recovery Remains Some Time Off).

Now ANZ Bank ((ANZ)) and Westpac ((WBC)) have provided their quarterly updates, and it would seem the trends evident a fortnight ago and extensively explained in the above article have been maintained.

The first trend is that all banks have enjoyed a more rapid reduction in bad and doubtful debts (BDD) than either analysts or managements had expected. Bad debt growth now appears to have plateaued post-GFC, allowing the banks to bring provisions for BDD back to the bottom line. All have nevertheless deemed it too early, and unwise, to bring back the less specific “management overlay” provisions against general financial sector crisis.

While the news on BDD is good news, returning provisions have simply served to make bottom line results look good. This is not “new” money, just earnings withheld for a couple of years against the possibility more loans would have to be written off. In terms of “new” earnings, the banks have not fared so well. A once-again weakening global economy and once-again rising funding costs due to Europe et al have slowed growth to a trickle.

The results for all four banks show a definite delineation into two pairs – the larger CBA and Westpac and the smaller NAB and ANZ. The Big Two took on the biggest slice of new home buyer “stimulus” mortgages and indeed the bigger slice of all business after the GFC when bigger did mean safer. The Little Two were not as aggressive initially and customers shied away, but this has proven to be to their benefit. The Big Two had been hoping funding pressures would ease and business credit demand would have begun to return by now to offset an overweighting in mortgages, but neither has proven the case. Hence the Big Two's margins have been eroded.

Now the housing market is under pressure and renewed recession fears are keeping business borrowers away in droves. Treasury and wealth management divisions are no longer making solid profits given a weaker market. With regulatory uncertainty still prevailing, FY11 earnings growth looks difficult. Analysts have agreed following Westpac's update that its earnings growth ahead will be pretty much zero.

The situation is not quite so bleak for the Little Two. While the reduction in CBA and Westpac margins did not particularly surprise, NAB did surprise by keeping its margins relatively steady. Then ANZ rather shocked on Friday by announcing a margin increase.

In an otherwise difficult market, it appears ANZ has hit somewhat of a sweet spot. ANZ is not as overburdened with retail loans as the Big Two (which each inherited further retail bulk with their respective BankWest and St George acquisitions). As the economic outlook weakens retail banking is facing stiff FY11 headwinds, but ANZ was able to pick up margin points by repricing (raising rates on) institutional loans and even New Zealand-based loans. This made the world of difference.

Incidentally, I tipped in the previous article that the banks would move immediately after the election to raise their mortgage rates. This has not happened, probably because in theory the election is not yet over.

On the other side of the coin, ANZ has been the only bank making definitive inroads into the burgeoning Asian market through acquisitions. This has led to a streaming of Asian deposits back into the books in Australia, bolstering tier one capital at a time when the other three are locked in a deposit battle between each other and smaller institutions.

[Note that Westpac is currently offering 6%pa on a six-month term deposit, while Virgin Money will give you 6.75% on four months.]

The offset to this deposit bonanza is rising costs, which did dampen what would otherwise have been a stand-out ANZ result. But all of the banks are currently facing cost increases.

The upshot of the difference between little ANZ and big Westpac is that ANZ is able to exhibit earnings growth and Westpac is not. Ahead of the results season, CBA was showing a 20% premium and Westpac a small premium to the others, but actual results question whether such premiums are still justifiable. Westpac shares have since taken a bollocking, so its premium is now all but gone.

The complete bank reporting “season” brought no upgrades to broker recommendations in the FNArena database, largely because ANZ was already on a sector-leading 8/2/0 Buy/Hold/Sell ratio. The two Hold raters, incidentally, don't see ANZ's leading growth levels continuing into FY11 while the remainder do. There were nevertheless downgrades, and currently only Macquarie still holds a torch for CBA while Aspect Huntley has the only Buy rating on Westpac.

This might change, given Aspect does not change its ratings before due consideration.

On a forecast earnings basis, all of CBA, NAB and Westpac copped downgrades, while ANZ enjoyed small upgrades.

As I noted last time, four members of the FNArena database are in some way involved in the NAB-AXA ((AXA)) takeover offer and are thus restricted from providing a rating. FNArena can only thus ascribe Hold, leading to a 5/5/0 ratio. But analyst rhetoric suggests the true ratio would probably be more positive.

As the following table shows, ANZ is now the definite stand-out in a difficult market. Yet on a consensus basis, Westpac still shows the greatest upside to target. Analysts struggle not to recognise underlying value in the bigger Westpac, but for the time being see little in the way of short-term catalysts.

Click to view our Glossary of Financial Terms