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What banks are performing the best in the current environment?

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

The major banks - Australia and New Zealand Banking Group (ASX:ANZ), National Australian Bank (ASX:NAB), Commonwealth Bank of Australia (ASX:CBA), and Westpac Banking Corporation (ASX: WBC) – and Macquarie Bank Group (ASX:MQG) are facing significant headwinds of slow credit growth and large loan impairment charges (also reflecting a contracting economy in 2020 due to the impact of Government measures to combat COVID-19), pressures on net interest margins (which could lower profitability) and over the longer term increased regulatory requirements (both capital and lending requirements).

 

bank

Consequently, in the short term at least, the major banks and Macquarie Bank may have lower growth prospects than other sectors of the market. It is noted that since the February 2020 share market high, Macquarie Bank’s share price has fallen 27%, CommBank’s share price has fallen 34%, ANZ’s and NAB’s share prices have fallen 46% and Westpac’s share price has fallen 52%. This means that the low growth prospects are factored into current share prices.

This poses the question to investors, what factors are driving bank performance in this challenging operating environment?

 

What banks have performed the best?

Macquarie Bank Ltd (ASX: MQG)

Macquarie Bank has performed the best out of the 5 banks mentioned above in this economic environment. Macquarie Bank 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 Bank, being an investment bank, operates globally and in different markets than CommBank, ANZ and Westpac (all which offer traditional banking services mainly in the Australian and New Zealand markets). Macquarie Bank has a market capitalisation of A$33.7 billion.

Macquarie Bank’s FY20 results were the most positive out of the banks mentioned above. Macquarie Bank’s net profit for FY20 is $A2,731 million (down 8% on FY19) and net profit for 2H20 is $A1,274 million (down 13% on 1H20 and down 24% on 2H19).

Macquarie Bank’s capital position continues to exceed Australian Prudential Regulation Authority’s (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. This puts Macquarie Bank’s in a stable position to navigate successfully through this economic environment. This can be shown through Macquarie Bank paying a final dividend per share of A$1.80 (40% franked), making the FY20 dividend $A4.30 per share. The FY20 dividend of A$4.30 represents a payout ratio of 56%.


Commonwealth Bank of Australia Ltd (ASX: CBA)

CommBank has also performed well during this economic environment. CommBank is the largest bank and second largest publicly listed company in Australia. CommBank has a market capitalisation of A$149 billion.

Although CommBank is expected to announce quarterly results soon, CommBank’s HY20 results released in February 2020 were positive. In particular, CommBank reported cash NPAT for HY20 of A$4,477 million, down 4.3% compared with the corresponding period. CommBank also announced payment of an interim dividend of A$2.00. This represents a payout ratio of 79% of cash NPAT. However, it is important to note that CommBank’s March quarter 2020 result is expected to include a large impairment charge due to the impact of COVID-19 is having on the economy.

A positive point from CommBank’s HY20 announcement was that CommBank’s home lending business increased by 4% in HY20 compared with HY19. In addition, this compares with growth of total home lending for the Australian economy of approximately 1.5%. That is, CommBank increased market share in the home lending business (which is CommBank’s key market).

CommBank has a strong capital position that exceeds APRA’s regulatory requirements. CommBank’s Tier 1 capital ratio is 11.7%. This puts CommBank in a favourable position to navigate through this economic environment.


How have the other major banks performed?

 

Australian and New Zealand Banking Group Ltd (ASX:ANZ)

ANZ is one of the largest publicly listed banks in Australia. ANZ’s business mainly focuses on providing banking and financial services in Australia and New Zealand. ANZ has a market capitalisation of A$47 billion.

ANZ HY20 result reported cash earnings of $2,451 million excluding large notable items of $1,035 million. This represents a fall of 24.6% compared with HY19. In addition to this profit result, ANZ reported that it has deferred a decision on its interim dividend until August 2020 when it hopes that there is greater clarity regarding the economic impact of COVID-19. ANZ’s management noted that in assessing its dividend options, ANZ considered the high level of uncertainty in the economic outlook as well as guidance from the APRA that all banks and insurers should consider lowering dividends until the outlook is clearer.

ANZ’s Tier 1 capital position at 31 March 2020 is 10.8% compared with 11.5% at 31 March 2019. This capital ratio is below Macquarie Bank’s and CommBank’s Tier 1 capital position. ANZ to date has decided not to raise additional capital to support its balance sheet.


Westpac Ltd (ASX: WBC)

Westpac is one of the largest publicly listed banks in Australia. WBC has a market capitalisation of around A$55 billion.

Westpac has faced several problems over the last 6-months. This began in November 2019 when AUSTRAC announced that they applied to the Federal Court of Australia for civil penalty orders against Westpac. AUSTRAC alleges Westpac contravened the AML/CTF Act on over 23 million occasions. In Westpac’s HY20 results, Westpac estimated the AUSTRAC fine to be $900 million.

Westpac HY20 result cash earnings for HY20 is $993 million, down 70% (excluding notable items $2,278 million, down 44%). Westpac also announced a $2,238 million impairment charge. This includes a $1,619 million impairment which is attributed to COVID-19 impacts. In addition, Westpac deferred its decision on payment of an interim dividend. This decision was made due to the economic uncertainty over the last 6-months, and this action should better position Westpac’s balance sheet going forward. Westpac provided no guidance when it expects to make a decision on its 2020 interim dividend.

Westpac’s Tier 1 capital ratio is 10.8% at 20 March 2020. The impact of the losses announced in Westpac’s HY20 report could impact Westpac’s Tier 1 capital ratio moving forward. This capital ratio is below Macquarie Bank’s and CommBank’s Tier 1 capital position. Westpac to date has decided not to raise additional capital to support its balance sheet.


National Australia Bank Ltd (ASX: NAB)

NAB is one of the largest publicly listed banks in Australia. NAB has a market capitalisation of A$47 billion.

For HY20, NAB reported cash earnings of $2,471 million excluding large notable items of $1,035 million. This represents a fall of 24.6% compared with HY19. Credit impairment charges rose by 158.6% to $1,161 million, and as a percentage of gross loans and acceptances rose 23bps to 38bps.

HY20 charges include $828 million of additional collective provision forward looking adjustments, of which $807 million is a top-up to the economic adjustment to reflect potential COVID-19 impacts. However, NAB decided to pay an interim dividend for HY20 of 30 cents per share (fully franked).

NAB also announced a capital raising comprising a fully underwritten institutional share placement of A$3 billion and a non-underwritten Share Purchase Plan, targeting to raise approximately A$500 million. The institutional share placement was successfully completed at a price of $14.15 per share. This capital raising is expected to increase NAB’s Tier 1 capital ratio to 11.2%. This capital ratio is below Macquarie Bank’s and CommBank’s Tier 1 capital position.


What is the key difference in the strategic approach to managing COVID-19 issues?

ANZ’s, NAB’s and Westpac HY20 results are very similar in respect of earnings, the magnitude of the impairment charge, the small fall in NIM and flat expenses. A key difference in strategic approach to managing issues associated with COVID-19 is that ANZ and Westpac decided not to raise additional capital at this point in time while NAB decided to raise $3.5 billion in new capital, and ANZ and Westpac decided to defer a decision on the interim dividend payment while NAB decided pay an interim dividend payment of 30 cents per share (but down from 83 cent per share in the previous period).

NAB’s decision to raise capital now reflects its view that one of the lessons from the Global Economic Crisis in 2008 is that the earlier new capital is raised the better off the bank will be going forward. It will be interesting to see how this difference in strategic approach to COVID-19 issues plays out in the months ahead. ANZ’s and Westpac’s approach of deferring a decision on paying an interim dividend protects their capital position in the current environment. There is a risk that these banks will ultimately decide not to pay an interim dividend for HY20.

In contrast, Macquarie Bank is in a different position from the major banks as it paid a dividend (but at a lower level) and decided not to raise new capital (noting that it raised new capital in 2019). As mentioned above, Macquarie is also different than the major banks as it operates in different markets.

 


 

Disclaimer:


This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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