Brokers To Focus On Bank Margins

Array
(
    [0] => Array
        (
            [0] => ((NAB))
            [1] => ((WBC))
            [2] => ((ANZ))
            [3] => ((MQG))
            [4] => ((CBA))
            [5] => ((CYB))
        )

    [1] => Array
        (
            [0] => NAB
            [1] => WBC
            [2] => ANZ
            [3] => MQG
            [4] => CBA
            [5] => CYB
        )

)

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies.
For more info SHARE ANALYSIS: NAB
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Bank sector earnings are expected to be more stable in the upcoming reporting season and margins will be the key area of focus for brokers going forward.

-Potential for modest upgrades, given benign provisioning
-Ability to re-price mortgages could be fading and volume growth slowing
-Asset quality and capital consistent but drivers of growth unlikely to be uniform
 

By Eva Brocklehurst

The upcoming bank sector earnings season is expected to be more stable than the previous year. Ord Minnett expects a benign provisioning environment should provide opportunities for modest upgrades. Nevertheless, the broker believes consensus estimates are too optimistic on the outlook for margins, given the ongoing drag from elevated term deposit pricing.

Macquarie considers the banks well situated, with near-term earnings to be well supported by mortgage re-pricing benefits, investor-led credit growth, a benign credit environment and solid trading income.

Still, the broker estimates banks are now trading 5% above their long-term price/earnings ratios, suggesting that the market is already priced in the improved expectations.

The longer term outlook is challenging for the sector, in Maquarie's opinion, as the ongoing ability to re-price mortgages is fading while mortgage volume growth is probably slowing.

Net interest margins are expected to be the main focus in the upcoming reporting season. Macquarie expects a full-year tailwind of 6-10 basis points. Further clarity is unlikely on bank capital, as an announcement from the Australian Prudential Regulation Authority is due mid year. Volume growth is expected to be firm in the near term, supported by strong investor lending.

Deutsche Bank agrees margin commentary and productivity programs are likely to be the major areas for the market to focus on. The broker expects solid half-on-half revenue growth and seasonally strong markets income.

The main areas of consistency are expected to be asset quality and capital, while drivers of growth are not expected to be uniform amongst the banks, with National Australia Bank ((NAB)) and Westpac ((WBC)) likely to witness the strongest trends in net interest margins. The broker expects ANZ Bank ((ANZ)) and Westpac to stand out on non-interest income, while National Australia Bank is likely to lag in cost control.

Australia And New Zealand Banking Group

Deutsche Bank expects a 2c per share lift in ANZ's dividend to 82c per share for the first half and believes the main issue to watch will be the run-off of institutional loans and the capital being generated from this strategy.

ANZ reports on May 2 and Ord Minnett is forecasting first half earnings of $3.34bn and a flat interim dividend of 80c per share. The broker suspects deciphering the underlying performance will be one of the main challenges in ANZ's results.

The headline March quarter update was strong but revenue growth was assisted by lower quality items and Macquarie does not expect this to be repeated in the second quarter. The broker envisages scope for the bank to positively surprise, with lower impairment charges to offset a weaker underlying result.

Credit Suisse will be scrutinising revenue quality and cost discipline. as well as the plans for deploying surplus capital as it emerges. The broker will also be looking for an update on the remaining business divestments.

National Australia Bank

Ord Minnett expects headwinds that have impeded the bank's revenue growth over the past five years or so would have carried through into the first half. The bank reports on May 4 and is expected to struggle to replicate the second half FY16 performance.

Mortgage re-pricing benefits and more rational competition should benefit the bank in the first half, in Macquarie's opinion, and net interest margins should be broadly stable.

Credit Suisse will be looking for a deconsolidation of divested earnings in FY17, and raises the issue of dividend sustainability, given the bank's relatively high pay-out ratio.

Deutsche Bank forecasts first half cash net profit of $3.23bn and a 99c dividend. The broker will be looking for whether net interest margin trends in the newly created Business & Private Banking division remain resilient and also the cost outlook, given elevated growth in costs in the first quarter.

Westpac

Macquarie expects an improved revenue performance when the bank reports on May 8. Credit Suisse will again be on the watch for dividend sustainability and cost efficiency initiatives.

Ord Minnett is forecasting first half cash earnings of $4.03bn and a flat interim dividend of 94c, equating to a pay-out ratio of 79%. The broker suspects the bank is facing a challenging margin environment from higher term deposit pricing.

Deutsche Bank will be noting margin commentary, given significant mortgage re-pricing across the industry in recent months. Non-interest income trends are also under scrutiny, given this item has disappointed the broker over several prior half-year reports.

Macquarie Group

Ord Minnett is forecasting FY17 cash earnings of $2.09bn and a 40% franked final dividend of $2.50 when Macquarie Group ((MQG)) reports on May 5, equating to a pay-out ratio of 72%. The broker expects Macquarie will have sustained a high run rate of asset realisations, assisted by modest underlying earnings growth.

Credit Suisse expects earnings for the full year to be driven by lower impairments and higher investment gains. Compositionally, earnings are expected to be incrementally driven more by commodities & global markets and Macquarie Capital and less by Macquarie Asset Management. Macquarie has guided to FY17 reported profit to be broadly in line with FY16.

Commonwealth Bank

Credit Suisse expects Commonwealth Bank ((CBA)) will post cash earnings for the March quarter of $2.52bn. The broker sits above consensus in its estimate by 3%, attributable to higher forecasts on each of revenue, costs and bad debt charges.

CYBG

CYBG ((CYB)) reiterated near-term guidance at its first quarter trading update but suggested that the cost profile was likely to be better in the second half than the first half. Credit Suisse will look for the inaugural dividend and a pathway to fulfilling the bank's dividend policy, which is for a modest inaugural dividend in FY17 and, in time, around a 50% pay-out.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms