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Last week we saw an earnings report from Bank of Queensland, the first of the domestic banks to report earnings in the October/November period. The report was largely in-line with analysts’ expectations, but the stock fell on the day and has continued lower since then. Perhaps the market was optimistic that results would surprise to the upside, but regardless, it serves as a reminder to look at the expectations of the BIG THREE reporting banks (CBA reported in August), to get a sense of how our one of our most important sectors will fare.

The first of the big three to report will be ANZ (ANZ), and notionally it looks the best of the expected results, relative to previous results. Ironically, it is also the cheapest bank on a price to earnings, and expected price to earnings basis. However, it does currently have a lower dividend yield than the other reporting banks, although both Westpac (WBC) and NAB (NAB) are expected to lower their dividends, whilst ANZ is largely expected to hold steady.

All the banks are expected to lift their net interest income, although they are all also expected to see lower revenues over all – which is largely a consequence of divestment of satellite businesses and other ramifications of the Royal Commission into the Banking and Financial Sector.

Whilst many Australian investors will rue the expected drop in dividends from WBC and NAB, of additional concern is the expected drop in earnings per share (EPS). Both NAB and WBC are expected to drop their EPS considerably, after customer compensation and remediation costs spiked following the royal commission – and some analysts are worried that this is just the tip of the iceberg.

On the 8th of October, ANZ disclosed that the full year cost of their customer remediation plan would be a $682 million-dollar reduction in profit after tax. On the 2nd of October NAB announced that their second half profit after tax would be reduced by $832 million dollars due to additional customer related remediation. WBC has yet to announce their costs, but they will likely see a hit as well.

Despite this, Australian banks are quite expensive on a price to earnings basis relative to global peers, with our banks trading on 14.4 times earnings on average, relative to 11.2 times earnings for S&P 500 listed banks. Historically this has been acceptable to Australian investors as they have received extremely large, franked dividends from the Australian banks. However, with dividends forecast to start coming down, I do think it creates some risk to the downside.

This should be an interesting reporting period for the banks, with lots of potential for share price movement and volatility. These results, unlike some previous reports, have plenty of potential for surprises to both the upside and downside. Given this is the case, these could be good reports on which to do reporting style trades, such as straddles and strangles. If you’d like to discuss such a trade, don’t hesitate to contact your TradersCircle advisor.