National Australia Bank and ANZ would appear to have ticked most of the boxes as their trading updates for the June quarter reveal improving margins, stable credit quality and modest capital generation.
NAB is expected to record a third-quarter cash profit of $1.64 billion on Friday - which is in line with the first-half quarterly average. Not to be outdone, ANZ will next Tuesday deliver a cash profit of around $1.72 billion, up 1 per cent on its first half quarterly average.
These updates come close on the heels of Commonwealth Bank logging a solid annual profit of $9.88 billion on Wednesday, which beat market estimates and caused the bank’s share price to claw back some of the losses prompted by allegations the lender broke money laundering laws.
The CBA result showed steady operating trends, with flat margins and a further improvement in corporate credit quality despite battling intense competition.
Accordingly, Morgan Stanley’s Richard Wiles thinks the third quarter promises to be a good one for the other three lenders.
"Margins will be flat or up slightly in the third quarter and there is some potential for a positive surprise at NAB, given home loan repricing and less pressure on funding costs."
No big surprises
However, the analyst is not unequivocally bullish.
“In our view, the outlook for banks in 2018 and 2019 is challenging. Still, a good third quarter margin outcome would give investors confidence that repricing benefits are not being competed away, supporting the prospect of earnings upgrades in the fourth quarter.”
The thinking is that Westpac is the biggest beneficiary here although it is not scheduled to provide a trading update. Nor is the analyst expecting any big surprises.
“In our view, a weaker-than-forecast outcome on loan losses or expenses by either ANZ or NAB would surprise investors and be poorly received.”
While opting not to offer much detail on third-quarter operating trends, Westpac will provide a credit quality and capital update on Monday, August 21.
Wiles thinks disclosure on capital and credit quality is likely to be broadly in line with its rivals.
“We see margin expansion, another good WIB result and a lower-than-forecast loan loss charge as factors which support the outlook for the 2017 second half," he said.
The banks’ current valuations suggest a lot more confidence in the domestic recovery than lenders show in their revenue lines, which leads Wiles to suggest that revenue trends will be the key area of focus for investors.