Shares of the “big-4” banks are trading sharply lower as the Government announced a $75 million Banking Royal Commission before the ASX open today.
When making the announcement, PM Turnbull said it was a regrettable but necessary action.
The terms of the inquiry are wider than the market expected and will include the entire financial services sector. The final report will be due in February 2019.
We have been giving the banks a wide berth recently due to likely headwinds from slower loan growth and falling profit guidance. We’ll continue to watch the ALGO engine for trade updates and future levels to enter the market.
The ANZ will announce its annual results on Thursday as the first of the major banks to report over the next three weeks. NAB will report next Thursday and WBC will report the following Thursday.
ANZ is expected to announce a full year cash profit of $6.89 billion and a DPS of 83 cents on revenue of $20.7 billion. Much of this gain is based on stronger owner-occupied home lending.
Analysts are expecting ANZ to be the first of the major banks to return capital to shareholders given its pro-forma position outlined by APRA last month.
At this point, the NAB’s profit forecast is expected to be $6.6 billion with a DPS of 99 cents.
MQG will report their half-yearly results this Friday. The numbers on the street are reflecting a profit of $1.1 billion with a DPS of $2.10 per share.
Since Treasurer Scott Morrison announced a banking levy in the May 9th budget, banking stocks have been sold off across the board.
It’s become clear that a fair percentage of this investment flow has rotated into the local Insurance names with IAG and Suncorp both posting material gains since early May.
We hold both of these stocks in client portfolios and they are now up 12% and 8% since mid-May, respectfully.
With respect to the re-valuation in the banking shares, NAB has posted a fresh low at 29.00 in early trade today.
Both WBC and ANZ are approaching the lows posted in early June, while MQG and CBA have held up better but are still pointing lower.
On balance, we continue to expect to see rotation out of the banking names to the benefit of the insurance stocks.
Australian banking names received a double-dose of bad news last night as the Parliament passed the $6.2 billion banking levy and Moody’s downgraded their long-term credit ratings citing risks associated with the local housing market.
Shares in all the major banks have opened lower today with Westpac half-a-percent lower. The banking stocks have posted a rebound over the last few sessions but now look poised to re-test the lower price levels seen in early June.
Our ongoing concern about the banking sector’s current valuations have been: limited growth in the loan generation area, as well as, deteriorating quality of their overall loan exposures.
The banking levy, which commences July 1st, and the prospects of higher funding costs due to the credit downgrade won’t improve the banking sector’s profitability over the longer-term.
On 2nd May, ANZ will report their half-year earnings. The market is expecting a net profit of around $3.7b and DPS for the half year of $0.80.
4th May, NAB will report their half-year earnings. Net profit should be around $3.4b and DPS of $1.00.
5th May, Macquarie Bank reports. Net profit is expected to be similar to last year at $2.15b and DPS of $2.52
8th May, WBC report their half-year result. Net profit should be $4b and DPS $0.95
On average, the market is looking for approximately 3% underlying EPS growth among the banks and dividends to remain steady, or the same as the previous 12 months.
Looking at the recent run up in ANZ, NAB & WBC, it would appear that the stocks are fully valued at these levels.
Either taking profits or selling at-the-money call options to enhance the income, (whilst staying exposed to the May dividend), is a reasonably prudent approach at this time.
US banks, (see chart below of JP Morgan), are breaking to the upside of their recent consolidation range, and this is likely driving the rebound in the share price of the Australian banks.
NAB reported a 1% fall in earnings following weak revenue growth and a pickup in expense growth. Bendigo Bank failed to deliver growth at the top or bottom line.
CBA reported slightly ahead of expectations with underlying profit growth of 2.8% or $4.9b for the half. ANZ’s quarterly update, (released Friday), reported a 31% rise in profits to $2b for the 3 months to December.
Across all banking results, the NIM or net interest margins, remain under pressure, as does top line revenue growth. These are the same concerns which caused the 10% sell off in banks at the start of this year.
We’ll watch with interest how prices behaves in both the XJO and our major banks this week, as we commence trading with price levels similar to the peak of early January.
We’ve been running a hedge on the Australian banks; CBA through an in-the-money European March option, NAB using an in-the-money American February option and WBC a longer-term call option. In ANZ our preference has been to exit the trade altogether.
On Friday, our domestic banks started to see some profit taking and the catalyst could’ve been selling ahead of the US banking results and/or the announcement of weaker export data out of China.
JP Morgan and BoA’s results , released last night, were adequate on the bottom line but both companies missed on the revenue front. Increased dividends and share-buybacks helped support what otherwise would’ve been viewed as weak results.
Currently, ASX leading Financials are being dragged higher as the US equity rally continues into the lead up to their fourth quarter earnings results. We’re somewhat sceptical of the valuation support and yesterday started hedging our banking exposure in client portfolios. This was done through using in-the-money European-style calls over CBA and slightly in the money February calls over NAB, as two examples.
In the case of CBA, we stay exposed to the February dividend and franking credit but have hedged a price pullback of up to 5% between now and March.
In NAB, we’ve hedged to a similar extend but without the need to protect the dividend. NAB’s next payment period is not until May
There is a saying in the financial markets that a “rising tide floats all boats” This old adage has been used recently to describe how the rally in US bank shares has lifted the share prices of Australian banks.
Since November 4th, shares of Citibank have gained 14%, shares of JP Morgan have gained 16%, shares of Bank of America have risen by 17% and Goldman Sachs shares have rallied by over 20%.
Over the same period of time, shares of ANZ have gained 6%, shares of Westpac have gained 8%, CBA shares have lifted by 8.5% and shares of the NAB have rallied by 11%.
Interest rates in the US began bottoming out in late September, which was positive news for most US financial names. In addition, the election of Donald Trump is being hailed as a “game changer” for the U.S. banking sector, as the Republican sweep of the White House and both houses of Congress appears to have shifted investor’s expectations about interest rates, regulation and the broader business environment.
With respect to the Australian banking names, these two key points aren’t applicable.
The RBA may have moved to a neutral bias on domestic interest rates, but there’s no realistic expectations for a rate hike anytime in the foreseeable future. And, if any regulatory changes are legislated in the Australian banking industry over the next 12 months, they are more likely to be restrictive, as opposed to accommodative.
With this in mind, we will use this recent rally in Australian banking names to implement our derivative overlay strategy and sell covered call options to enhance returns on bank share holdings.
Stay tuned to the Investor Signals daily blog for specific timing and price information.
Chart – WBCChart – NABChart – ANZ
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Chart – ANZ
