In Brief: Banks, Trusted Brands & China

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

The sustainability (or not) of bank dividends; the most trusted brands in Australia & opportunities in China despite structural headwinds.

-Bank dividend payouts unsustainable beyond FY25
-The most trusted brands in Australia
-Opportunities in China despite structural headwinds

By Mark Woodruff

Bank dividend payouts unsustainable beyond FY25

While there is scope for Australian banks to retain elevated dividend payout ratios in FY24-25, they are unsustainable for some banks beyond that time, suggests Macquarie, unless impairment charges remain at current low levels.

The broker holds these fears for dividends given bank profits are coming under pressure from lower mortgage returns and competition for deposits.

Macquarie had previously incorporated dividend cuts into its forecasts for National Australia Bank ((NAB)) and Westpac Bank ((WBC), until the Australian Prudential Regulation Authority (APRA) recently proposed revisions to capital requirements for interest rate risk in the banking book (IRRBB).

IRRBB refers to the current or prospective risk to banks’ capital and earnings arising from adverse movements in interest rates that affect banks’ banking book positions.

The proposals, which come into effect in October 2025, are intended to simplify and remove complexities in the framework and reduce volatility in the capital charge, explains Morgan Stanley.

Initially, Macquarie was surprised by recent confidence displayed by banks in the sustainability of dividends, but now suspects the answer lies in likely capital tailwinds from an unwind in the IRRBB.

Throughout FY22, the IRRBB consumed around -55-80bps/$2.5-3.7bn of common equity Tier 1 (CET1), notes Macquarie. Given the current swap rate profile, the analyst forecasts the IRRBB will add circa 30-45bps to CET1 by the end of FY25 as the portfolio matures and is reinvested at higher rates.

The forecast by Morgan Stanley is for an IRRBB range of between 5-7% of total risk-weighted assets (RWA), implying an around -$25-$62bn reduction in RWA, which would add an average of 15-45bps to CET1 ratios.

With the expected IRRBB capital uplift, banks should have scope to utilise surplus capital and maintain their elevated payout ratios in the short term, concludes Macquarie.

While now removing previous dividend cut forecasts for NAB and Westpac, this broker feels it’s just a matter of time before dividends will need to be cut, particularly for these two banks.

The most trusted brands in Australia

Some say the most precious thing in this world is trust. It can take years to earn and only a matter of seconds to lose.

In the realm of business, it seems Australia’s favourite hardware chain, Bunnings, has been doing well of late in earning the trust of its customers. 

Respondents to a survey conducted by Roy Morgan have elevated the company, owned by Wesfarmers ((WES)), to second place behind Woolworths Group ((WOW)) on the list of the most trusted brands in the 12 months to September this year. Coles Group ((COL)) dropped a rung to third.

The most trusted brands are still dominated by major retailers, with Aldi and Kmart once again rounding out the top five positions.

According to Roy Morgan CEO Michele Levine, “Bunnings has harnessed many of the foundational pillars of a trusted brand including great customer service, communicating what it stands for and delivering, being an active part of the community, solving customer’s problems and expertise and product knowledge.”

Sadly, assessments and procedures by executives and company directors across all industries should formally factor in distrust, suggests Roy Morgan.

The impacts from the extensive service outage at Optus in early November have provided a salutary reminder that dealing with distrust should be on the risk radar of every board in Australia, suggests Ms Levine.

So, it should be no surprise the Roy Morgan survey revealed Optus remains the most distrusted brand, followed by long-standing most distrusted brand Facebook/Meta and then Telstra Group ((TLS)).

Embattled airline Qantas Airways ((QAN)) is next on the Roy Morgan survey list, followed by News Corp ((NWS)) in fifth place.

Opportunities in China despite structural headwinds

As a result of a high degree of headline macroeconomic uncertainty and pessimism, great companies in China can be acquired at very attractive valuations, according to global investment manager Ninety One, despite several structural challenges for the wider economy.

Chinese policymakers will continue to stimulate the economy until a durable recovery takes hold, predicts Ninety One, which forecasts a more benign outcome for the Chinese economy in the next couple of years.

Citi agrees on the need for stimulus, but recent research by the analysts takes on a more urgent tone by highlighting a deepening deflation issue. This problem was illustrated by weak November CPI and PPI readings that revealed a triple-whammy from lower domestic food prices and international commodity prices, as well as soft domestic demand. 

According to this broker, there is no time for policy hesitation. Intervention is required via lower interest rates and/or by cutting the reserve requirement ratio (RRR) for banks, to prevent a vicious loop between deflation, confidence, and economic activity. Already, price weakness is spreading from goods to services, with rent and tourism considered two areas of concern for Citi.

Iain Cunningham, Head of Multi-Asset Growth at Ninety One, lists four primary structural challenges: mounting real estate woes, weakening demographics, geopolitical headwinds and negative impacts on the banking sector from ongoing bailouts.

Ninety One is avoiding investments in real estate as the Chinese government’s overall objective is to manage this sector lower over multiple cycles, in line with its “cross-cyclical policy” (ie taking action sooner, in smaller steps and with a longer time frame in mind). Despite this overall goal, the government is providing targeted stimulus, with the objective of cyclically stabilising the sector.

On the geopolitical front, foreign direct investment into China and direct Chinese exports to the US are falling, notes Ninety One, due to “de-risking” and the reworking of supply chains in the developed world. Nonetheless, it’s noted overall exports by China have continued to rise in recent years, and remain stable as a percentage of global exports, because of the increasing importance of countries outside of the G7.

Regarding ongoing bailouts, Chinese authorities pledged to “implement a comprehensive debt solution” for local governments at July’s Politburo meeting. In recent months, Ninety One notes there has been (an effective) refinancing of debt (an extension for maturities at much lower interest rates) via announced debt swaps for several provinces, while state banks have been told to implement the same measures.

Despite these structural headwinds, Ninety One is confident some areas of the Chinese economy should thrive.

Growth in per-capita income will support ongoing trends in premiumisation and localisation, suggests Ninety One, while digitalisation will see increased penetration.

Additionally, medical technology will be supported by an ageing population, while certain financial institutions will be beneficiaries of state efforts to divert future marginal savings from real estate into capital markets over time.

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