Feature Stories | 10:00 AM
Australia's major banks once again largely met consensus forecasts in the November reporting season. The sector also has finally seen the sell-off warned of all year.
- Australian major banks again called overvalued ahead of result season
- Banks again posted benign results
- This time, meeting forecasts was not enough to justify valuations
- Results have opened up divergence between Aussie majors
- Buy ratings still the sector's hen's teeth
By Greg Peel
Six months ago, ahead of the May bank reporting season, sector analysts were concerned valuations were too high.
The buzz-phrase at the time was “cost of living”, and the RBA had lifted cash rates to control higher inflation (i.e. the cost of living), suggesting mortgage strain on households on top of generally higher prices would lead to loan arrears and bad debt write-offs, reducing bank earnings.
Given elevated valuations, it was incumbent on the banks to post at least consensus-meeting results to avoid a sell-off, analysts warned.
They did.
Westpac ((WBC)), ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) posted first half FY25 (year-end March) results, while Commonwealth Bank ((CBA)) provided a March quarter update.
Most notably, bad debts were benign. While revenues were lower in the period, the asset quality (bad debt) outcome along with solid market income (banks’ market trading) supported earnings, and dividends.
In the following six months to November, bank share prices continued to rise, and rise, although shares in the supremely overvalued CommBank did peak and ease back in the period. The drivers behind the gains were many, beyond not-as-bad-as-feared earnings results.
After March comes April, and that’s when Trump unleashed hell on global trade. Despite TACO and flip-flopping ever since, global trade uncertainty, and thus economic uncertainty remains to this day. Australia’s AA-rated banks are seen globally as safe havens --equity equivalents of gold-– and hence drew global inflows.
Weakness in China’s economy led to expectations of lower commodities demand, and hence selling in Australia’s resource sector –- funds which typically flow into banks.
Superannuation inflows continue to grow, requiring allocation to the Australian market’s largest sector. Buying begets buying by index-tracking funds.
Just how far could the market push PE multiples beyond their longer-term averages?
Dark Clouds
Looking ahead in May toward November, bank analysts were concerned about a weakening Australian economy, aided by a weaker Chinese economy, leading to rising unemployment.
This, combined with gradually easing inflation, would lead the RBA to continue to cut the cash rate, and that would weigh on banks’ net interest margins (NIM) and thus earnings.
Rising unemployment would lead to rising bad debts. The offset would be lower mortgage rates, but a weak economy would reduce loan demand from both businesses and households. Lower cash rates would impact on bank NIMs.
Unemployment has indeed risen in the past six months, but only slightly, from historically low levels, and has actually been both up and down in monthly figures. Inflation was easing, but has ticked up again recently, albeit largely due to the expiry of the government’s electricity rebates.
As I write, the October CPI numbers have just dropped (now a comprehensive monthly measure consistent with prior quarterly assessments). The headline rate is up to 3.8% from 3.6%, and core to 3.3% from 3.2%.
The RBA Governor Bullock stated earlier this month that "it's possible that there are no more rate cuts" and "it’s possible there’s some more". Not exactly helpful, but these latest CPI data suggest the former.
Australia’s economy has not weakened. Loan demand has not fallen –- quite the opposite. The housing market once again has a rocket under it, further fuelled by the government’s first home buyer scheme.
On that basis, fears of a downturn in bank earnings eased into the November result season, but given elevated valuations –-even more elevated than they were in May-– analysts were again warning the banks had better post results that beat consensus, given simply meeting consensus this time would likely not be enough.
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