Australian Bank Reporting Season Preview

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By Greg Peel

“The most interesting reporting season for several years looms,” said Citi last week. The broker believes large organisational restructures are nigh.

Westpac ((WBC)) will report first half earnings on Monday, ANZ Bank ((ANZ)) on Tuesday and National Bank ((NAB)) on Thursday. Commonwealth Bank ((CBA)) reported in February.

The good news, as far as Citi’s assessment goes, is that any clear change of strategic direction accompanying restructures will be a positive catalyst. The bad news is that the broker believes both ANZ and NAB will cut their dividends – ANZ as part of a broad, firm-wide restructure, and NAB due to a sharp rise in bad and doubtful debt (BDD) expense.

UBS expects the banks to look through the spike in BDD charges and hold their dividends. But if it transpires that the banks have not adequately provided for some recent high-profile corporate distress, and here we are talking Dick Smith, Slater & Gordon, Arrium, Peabody and others, the market is not going to like it, UBS warns.

Credit Suisse notes ANZ has already warned twice on BDDs heading into result season and Westpac has referred to a provision review, but NAB has been silent. Aside from specific corporate exposures, Credit Suisse also notes potential BDD issues related to the New Zealand dairy industry and to the mining & energy-exposed Australian states.

Macquarie notes ANZ and CBA are overweight loans to miners. CBA is overweight exposure to the WA economy. ANZ is overweight exposure to NZ dairy, as is CBA.

UBS suggests results this season will be “messy”. ANZ has been busy restructuring its international and institutional businesses, Westpac will be providing new divisional disclosures and NAB will be reporting pro-forma numbers for the spin-off of Clydesdale. Other than messy, UBS expects overall results to be relatively weak. The broker is forecasting a 4.1% fall in first half sector earnings.

Outside of bad debts, the two main areas of focus will be net interest margins (NIM) and tier one capital ratios. NIM expansion occurred as a result of mortgage repricing in the period but this will have been offset by higher funding costs, lower prevailing rates and competition, UBS suggests. Basel 4 international bank regulations are expected to be finalised later this year and APRA's definition of “unquestionably strong”, with regard to Australia’s bank capital positions, is due early in 2017.

CLSA has previously warned of all the major banks being forced into a second round of capital raisings as a result of regulatory requirements.

It all sounds very gloomy, but brokers note that bank share prices have taken quite a hit this year. There remains the possibility of upside share price spikes on less-bad-than-expected results, as was the case for US banks earlier in the month.

To that end, Macquarie further notes short positions in bank shares are currently at their highest levels since 2011. ASIC’s most recent data show ANZ on 2.9% shorted, NAB on 1.6% and Westpac on 2.7%. Short positions have risen 50% in 2016 as bank prices have fallen around 10%.

Macquarie sees upside share price risk in bank results given how negative market sentiment has become. Increased short positions are evidence of such sentiment, but also a source of share price upside were results to spark short-covering. The broker sees fundamental value in the sector at current levels. There is further near term upside risk on offer if the banks undertake another round of mortgage repricing after the July federal election, the broker suggests.

Macquarie also sees the downside as limited, were results not to be well received. Retail investors account for some 50% of bank share registries and were net buyers of banks in the March quarter. Retail investors are maintaining a strategy of buying the dips and the broker does not expect any change to this strategy, especially if dividend support remains in place.

The table below highlights ratings and forecasts from the eight major brokers in the FNArena database. The table corroborates analyst belief that bank share prices have already priced in weak sentiment and maybe too much of it.
 

On a net basis, the database brokers have set 13 Buy ratings, 17 Hold and only 2 Sell. Interestingly there are no Sells on CBA, which for eternity bank analysts have considered to be afforded too generous a premium over peers. Target prices are 4-9% above current trading prices.

Earnings forecasts have come down but so too have share prices, thus on 6-7% yields, fully-franked (at least for now), it’s hard to ignore such a return in a low interest rate world. Yields will nevertheless be under threat if dividends are cut and/or further capital raisings are required.
 

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