Banking on the banks

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Leading into the latest bank reporting season, there were uncertainties that had many investors on edge such as the continued fallout from the Royal Commission, rising funding and operating costs and a possible looming property collapse. Particularly for retail investors seeking income via bank stocks for their SMSF.

So how did they perform? We look at the strengths and challenges that each bank faces following their latest reports, and their suitability for investors moving forward.

Australia and New Zealand Bank Limited (ANZ) – Reported 31/10/2018


Overall the Bank achieved a reasonable result in a challenging operating environment and retains a sustainable dividend payout ratio. Positive trends in reducing its operating expenses saw them drop by 1.5% and is now on track to deliver higher cost savings than its peers. Also, impairment charges continue to benefit from pristine credit quality.


It continues to be a tough operating environment and revenue headwinds are becoming more persistent with loan growth impacted by intense mortgage competition in its domestic market. Net interest margins (NIM) also declined on higher wholesale funding costs and reduced levels of new interest-only lending.

National Australia Bank Limited (NAB) – Reported 01/11/2018


The restructuring program to become a simpler bank appears to be progressing well. It has not negatively influenced the positive momentum in its core franchise, as net interest margins were shielded once again by the strength of its strong business banking unit. The group also delivered on its FY18 cost guidance, and retained its flat guidance into FY19-20


Though it was able to maintain its dividend at the same level this year, there is a distinct possibility for a reduction in FY19 given the Bank’s low margin for error and elevated risks in the sector. NAB will likely continue to rely on its dilutive dividend reinvestment plan (DRP) to maintain its dividend at current levels. The Bank is required to maintain a Common Equity Tier 1 ratio of 10.5% by 2020 and is currently at 10.2%.

Macquarie Group Limited (MQG) Reported 02/11/2018


As expected, MQG upgraded its full-year guidance following a strong performance from its capital markets divisions, which demonstrated the strength and diversity of its business mix. Base fees increased by 11.2% as assets under management continued to grow. Its infrastructure unit, MIRA, continues to strengthen, highlighting the demand for real assets in a rising interest rate environment. The diversity in MQG’s geographic business mix also proved favourable with the group benefiting from a rising USD and lowered US corporate tax rates.


There were not many. In fact, this was as strong a result as could have been expected from any of the banks.

Westpac Banking Corporation Limited (WBC) Reported 05/11/2018


The result was pleasing from a capital perspective with its Common Equity Tier 1 Ratio (CET1) of 10.6% moving above APRA’s target of 10.5%. While the dividend payout ratio of 80% remains elevated and above the bank’s target range, we expect solid ongoing organic generation to help maintain its strong capital position and support an elevated payout ratio into FY19. WBC also did well on cost efficiency and issued better than expected operating costs guidance for a 1% reduction in FY19, excluding customer remediation costs.


Given the Bank’s higher exposure to interest-only lending than peers, the ongoing switching to principal and interest loans is having a more significant effect on WBC. Its Consumer Bank experienced a decline in its net interest margins of 26bps during 2H18, which was partially offset by margin stability in its Business Bank, as well as its Institutional and New Zealand divisions.

Commonwealth Bank of Australia Limited (CBA) Updated 07/11/2018


An improving operating performance, specifically in non-bank income and decreasing underlying operating expenses, were the major takeaways. Volume growth in home lending of 3.1%, was largely offset by a decline in NIM which was a result of higher funding costs and home loan competition. Deposits grew by 8.9% on an annualised basis which was pleasing, given the challenges to source funding cost effectively.


As touched on earlier, the Bank is still demonstrating weak net interest income growth as margin pressures offset loan growth. CBA’s dividend appears sustainable only because the group’s capital position will be comfortably above APRA’s target levels following the future completion of divestments.

Final summary

The outcome from all the banks was pleasing in a relative sense. While the results were not of themselves outstanding, it could have been much worse. All remain Financially Healthy with balance sheets better than most developed nations. For the moment they can each cover their much-prized dividends, though NAB poses the greatest risk.

We have retained all the banks covered in this article as Star Income Stocks, though Macquarie Group (MQG) is also a Borderline Star Growth Stock. This latest report confirmed why, in our view, it is the best all-round bank for investors to consider from a growth perspective. Its upgraded guidance, strong business mix, robust surplus funding and ample capital available for growth makes it top of the class this season.

Source: Lincoln Indicators and company financial statements

Published Monday, 12 November 2018 | Financial Review

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