Banks report - What to watch for!
Earnings season kicks off this week with three of the big four banks reporting first-half results for 2021 against the backdrop of a recovering economy.
First up is Westpac which will report on Monday. May 3. Morgan Stanley is forecasting a cash profit of $3.57 billion, or $3.85 billion excluding notable items such as customer remediation costs. The next cab off the rank is ANZ will report on Wednesday, May 5, and is expected to post a continuing cash profit of about $3.31 billion or A$3.61 billion, excluding notable items.
One day later, on Thursday, May 6, National Australia Bank is estimated to report continuing cash profit of $3.16 billion or $3.23 billion excluding large and notable items. Lastly, on Wednesday, May 12, Commonwealth Bank - which has a June balance date - will release a third-quarter trading update which will show a cash profit of $2.3 billion, excluding notable items.
The outlook for the sector is increasingly bullish and the big question is whether the reporting season will deliver higher forecasts and higher share prices. Investor expectations have increased, according to Morgan Stanley’s Richard Wiles who believes the banks' upgrade cycle will continue to be supported by provision releases and a more modest rise in underlying loss rates, housing loan growth, and margins.
“This should provide more comfort on capital management prospects, including a stronger recovery in dividends this year,” he said in a note.
Five key themes
The broker has identified five things to watch out for this profit season: loan growth, margins, provision releases, underlying loss rates, costs and capital management.
APRA data shows a pick-up in mortgage trends, and Wiles is forecasting positive but slowing Australian housing loan growth at ANZ (up 2 percent) at system growth at CBA (around one percent on the quarter), positive but low growth at NAB (up 0.5 percent half-on-half and the start of a turnaround at Westpac which he estimates will be up 1 percent.
“Looking to the second half of 2021, 2H21, we think CBA and Westpac have the highest probability of exceeding our current estimates.
"Separately, we forecast modest Australian non-housing loan growth, although we'd expect more positive second-half outlook commentary.
Perhaps more notable, margins surprised “positively” during the December quarter, driven by lower wholesale funding costs, deposit re-pricing, and significant funding mix benefits. While these trends slowed in the March quarter, Wiles went on to say, the broker is still forecasting modest margin improvement of three basis points at ANZ, two basis points at Westpac, excluding remediation, and four basis points at NAB. “We expect margin decline to resume in the second half of the year but would be surprised if banks provide detailed guidance.”
Releasing Covid provisions
Due to the financial impact of the Covid pandemic not being as bad as first thought, the banks will be forced to release the money set aside for loan losses that have not eventuated. The big four banks collectively released $750 million in the December quarter and Morgan Stanley is expecting a further $1billion to be reversed out in the March quarter, with the largest release at NAB.
The banking analyst also expects underlying loss rates to remain close to 10 basis points, resulting in first-half impairment charges of $125 million at ANZ a $351million charge at Westpac. at WBC, and a third-quarter charge of $39 million at CBA. However, he estimates a $30 million benefit for NAB.
“We think there is potential for even better outcomes, although commentary should caution against extrapolating these results,” Wiles added.
On costs, Wiles sees little potential for positive cost surprises in this set of results. Regarding capital management, he forecasts a further rise in common equity tier one ratios. He estimates 11.9 percent at ANZ, 12.3 percent at CBA, 11.9 percent at NAB, and 12 percent for Westpac. “We believe boards will take a prudent approach to capital, meaning buybacks are unlikely and payout ratios will remain at around 65 percent.”