Bank Outlook Not Without Challenges

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-Bad debt charges may rise
-Low earnings per share growth
-Margin stability in focus
 

By Eva Brocklehurst

What is expected from Australia's major banks in their upcoming earnings reports? Brokers expect the news will be mixed, although recent mortgage re-pricing reveals the market power of the big four players and their ability to insulate returns. The medium term outlook, in the view of analysts, will not be without its challenges given ongoing changes to regulatory requirements.

UBS suspects, while earnings may be stronger overall, bad debt charges will also be higher as the benefits of improved asset quality and the run-down in provisions come to an end. Dilution from recent capital raisings provides an obstacle to earnings per share and on that metric brokers expect little or no growth across the major banks. Goldman Sachs expected diluted cash earnings growth around of 11%, generally, and ordinary dividend growth of 1.0%.

The sector should be well supported over the remainder of 2015, the brokers maintain. Near-term capital requirements have now been met and asset quality is benign, while earnings momentum is underpinned by mortgage re-pricing. Even with higher mortgage risk weights, pro forma returns are healthy, in Citi's view, with retail banking still offering the best returns in the sector.

Goldman Sachs still believes the sector needs an additional $14bn in capital to become "unquestionably strong" over the next 2-3 years but should be able to raise this organically or via dividend reinvestment plans.

JP Morgan expects margins to remain stable, while expenses will likely to grow as the banks invest in technology to meet industry requirements. The broker expects a non-recurrence of write-backs will underpin asset quality, as low interest rates continue to support values and reduce losses. The prospect of official cash rate reductions have likely been brought forward by the mortgage re-pricing and this presents downside risk to sector margins, in Goldman's view.

The main upside risk, Deutsche Bank maintains, is from market trading and treasury income, should the better-than-expected result that was pre-announced at Westpac ((WBC)) be replicated across the other banks. Given the recent capital raisings the broker also expects to hear more on the optimisation of returns.

Surprises are unlikely after ANZ Bank ((ANZ)) delivered a warning with its institutional placement back in August. UBS expects the market will focus on its bad debt provisions. The broker is looking for more detail on credit risk grade migration, noting that ANZ is the only one of the four that has acknowledged this factor. Deutsche Bank also questions its worse-than-peer bad debt trajectory.

Global market revenue is another area of focus for ANZ and UBS wonders whether it will be forced to impair its investment in Malaysia. In a similar vein, JP Morgan will also focus on the performance of the offshore franchises, given volume growth has been slowing and margin pressure continues.

Goldman is more upbeat on the Asian franchises and ANZ Bank remains its top pick among the majors. The broker notes there is strong momentum in the domestic franchise, as well as an attractive valuation.

National Australia Bank ((NAB)) is expected to provide an update on the de-merger of Clydesdale Bank, progress on which Deutsche Bank will be observing closely. It will take conduct charges of GBP350-500m above the line, funded from its indemnity, and the broker will also be looking for further clarity on its liabilities. Aside from Clydesdale, accounts will also be re-stated to exclude Great Western Bank.

UBS expects NAB's underlying result will be reasonable and reveal an ongoing improvement in asset quality. The bank's rate of growth in housing has been in decline recently, given its intention for investor volumes to fall below the APRA threshold of 10%. JP Morgan will home in on this detail. Also, the broker will note whether volume recovery and the hiring of bankers to chase market share in business credit has come at the expense of margins.

Westpac has guided to FY15 cash earnings of $7.82bn and a final dividend of 94c a share. JP Morgan will assess the performance of the underlying margins and the drivers of elevated cost growth. The key issues for Deutsche Bank will be further detail on the net interest margin and management's strategy to maintain returns.

Commonwealth Bank ((CBA)) is expected to reveal a strong first quarter update. JP Morgan expects cash earnings of $2.4bn and will look for any sign of asset quality weakness, given the rise in personal lending arrears in the second half of FY15 and the exposure to Western Australia through Bankwest.

The first half results for Macquarie Group ((MQG)) are due on Friday. The bank has guided to earnings being up 55% on the prior corresponding half. JP Morgan forecasts an interim dividend of $1.60 a share, taking the pay-out ratio to 50%.

Further clarity will be sought on the prospects of a continued benefit to Macquarie from a weakening Australian dollar and whether this is offset by a reduction in market volatility – and hence a more subdued result for the securities business. The broker raises FY16 earnings estimates but suspects if volatility continues in Hong Kong and China then there may be further upside. JP Morgan forecasts a further $400m in performance fees in the first half.

NAB will report tomorrow, ANZ on Thursday and Westpac next Monday.
 

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