Commonwealth Bank of Australia Ltd (ASX: CBA)
CommBank is the largest bank and second largest publicly listed company in Australia. CommBank has a market capitalisation of A$113 billion.
How has CommBank performed in this current economic environment?
CommBank operational performance has been a stand out when compared to the other 3 Australian major banks such as National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and Westpac Banking Corporation Ltd (ASX: WBC).
During the March quarter, CommBank reported a cash net profit after tax for Q3 FY20 of $1.3 billion (broadly in line with previous average). CommBank has maintained a strong capital position with Common Equity Tier 1 (CET1) ratio of 10.7%. This was reduced from CommBank’s CET1 ratio of 11.7% at the end of 31 December 2019. This is still above APRA’s ‘unquestionably strong’ ratio of 10.5% and well above the minimum ratio of 8%.
CommBank also announced that it has entered into an agreement to sell the 55% interest in Colonial First State (CFS) to KKR (a global investment firm). The transaction implies a total valuation for CFS on a 100% basis of $3.3 billion, which will result in CommBank receiving cash proceeds of around $1.7 billion. This sale is expected to deliver an increase of approximately $1.4 billion - 1.9 billion of CET1 capital. This should move CommBank’s CET1 capital ratio around 30 – 40 basis points higher than APRA’s basis as at 31 March 2020.
CommBank’s business performed well despite the troubling environment. CommBank’s home lending, household deposits and business lending were all up 1.2x system, 1.6x system and 4.2% respectively.
What is the outlook for CommBank?
In terms of the economic outlook, CommBank notes that GDP growth in 2020 calendar year is expected to be negative 6%, with a large turnaround in 2021 with GDP growth of 6%. Unemployment in the 2020 calendar year is estimated between 8 – 10%, with unemployment remaining on average around 8% in 2021 calendar year.
Even though the Australian economy is facing a major contraction this calendar year, CommBank’s capital position remains strong and provides enough liquidity to navigate through this environment. In addition, as shown from this result, CommBank’s business remains strong with growth through this troubling period.
Macquarie Group (ASX: MQG)
Macquarie Group Ltd (Macquarie Group) is a global provider of banking, financial, advisory, investment and fund management services. Its four business units are Macquarie Asset Management, Banking and Financial Services, Commodities and Global Markets and Macquarie Capital. Macquarie Group has a market capitalisation of A$37 billion.
How has Macquarie Group performed in this current economic environment?
Macquarie Group FY20 results showed that the bank has performed soundly in this economic environment. Macquarie Bank’s net profit for FY20 is $A2,731 million (down 8% on FY19).
For FY20, Macquarie Bank’s net operating income (excluding credit and other impairment charges) in FY20 was $A13,365 million, which was in line with FY19. International income accounts for 67% of Macquarie Bank’s total income. Operating expenses of $A8,871 million were in line with FY19, with staff numbers increasing to 15,849 at 31 March 2020, up from 15,602 at 31 March 2019.
Macquarie Bank’s capital position continues to exceed APRA’s regulatory requirements. Macquarie Bank’s Tier 1 capital ratio is 12.2% at 31 March 2020. Importantly, Macquarie Bank has a capital surplus of $A7.1 billion at 31 March 2020, up from $A6.1 billion at 31 March 2019. In addition, Macquarie Bank’s liquidity position remains sound. As at 31 March 2020, Macquarie Bank’s Leverage Ratio is 5.7%, Liquidity Coverage Ratio is 173% and Net Stable Funding Ratio is 118%.
What is the outlook for Macquarie Bank?
Macquarie Bank’s management notes that market conditions are likely to remain challenging over the year ahead, especially given the significant uncertainty caused by the worldwide economic impact of COVID-19 and the uncertain speed of the global economic recovery. Consequently, the extent to which these conditions impact Macquarie Bank’s overall FY21 profitability is uncertain, making short-term forecasting extremely difficult. Accordingly, Macquarie Bank is currently unable to provide meaningful guidance for FY21.
The major banks and Macquarie’s Group are trading in PE ratios in the low to mid-teens and dividend yields of more than 5%. This means that the major banks are priced more cheaply relative to some other sectors of the market. However, the major banks face significant headwinds including the economic impacts of COVID-19, slow credit growth (also reflecting weak economic growth), pressures on net interest margins (which could lower profitability) and increased regulatory requirements (both capital and lending requirements). That is, in the short term at least, the major banks may have lower growth prospects than other sectors of the market and there is a significant risk that bank dividend payments could fall over the next year or so. This has already been recognised with ANZ and Westpac deferring their interim dividend and NAB with a significant decrease in their interim dividend.
This poses the question for investors - if investors want exposure to the Australian banking sector, which banks have been performing the best? From the most recent profit results, CommBank and Macquarie Group have been performing the best in this troubled economic environment. In addition, Macquarie Group final FY20 dividend per share is $A1.80 (40% franked). The FY20 dividend of A$4.30 per share which represents a payout ratio of 56%. CommBank’s interim dividend of A$2.00 per share which represents a payout ratio of 79%.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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