The key features of the big banks’ 2017/18 results were soft revenue trends, particularly in their retail banking divisions, offset by low impairment charges and stronger capital positions. The outlook is for more of the same.
In its review of the banks’ full-year result, Macquarie Securities says t6he revenue outlook is “not positive”, with higher funding costs, competition as intense as ever and credit growth slowing. Offsetting this to some extent, banks will continue to increase interest rates on home loan and other credit products.
Earnings growth will depend, to a large extent, on the banks’ ability to cut costs. Remediation costs hit the banks’ bottom lines and will continue to do for the next couple of years.
Macquarie says a positive for the banks was that credit quality trends remained supportive.
Macquarie’s picks in the sector are ANZ and NAB, both of which it rates ‘outperform’. It has neutral ratings on Commonwealth Bank and Westpac and ‘underperform’ ratings on Bank of Queensland and Bendigo and Adelaide Bank.
ANZ’s result was distinguished by an “abnormally low” impairment charge and effective expense management. The bank is in a strong capital position and is likely to offer buy-backs in the year ahead, which will improve its earnings per share.
NAB had better than expected revenue growth.
Westpac suffered a 20 basis points fall in its margin – a result of its competitive approach to the mortgage market. Macquarie expects the bank to deliver lower margins in the current financial year. “Coupled with slowing credit growth, this suggests that underlying revenue trends are likely to remain weak,” it says.
CBA’s revenue fell short of expectations. “The recent revenue trends suggest that the franchise is currently not performing at its optimal level. CBA’s declining revenue and its desire to continue to invest in the franchise do not bode well for its 2018/19 performance,” Macquarie says.
In other parts of the banks’ operations, income from capital markets activities was down and business banking was patchy.
Dividend payout ratios have reached very high levels: 71 per cent for ANZ, 82 per cent for CBA, 95 per cent for NAB and 80 per cent for Westpac. Macquarie believes high payout levels can be sustained if credit conditions remain benign and credit growth continues to ease.
The banks’ return on equity continued to fall in 2017/18. ANZ’s ROE was 11.3 per cent, NAB’s 13.4 per cent, Westpac’s 14.7 per cent and CBA’s 15.6 per cent. In the years immediately after the GFC big bank ROE was around 20 per cent.
ANZ was the only bank to reduce its cost-to-income ratio. The others recorded steep increases. This was despite reductions in headcount and lower personnel expense for all the banks.