Its currently that strange reporting period where we see several of the major banks and few other companies report. This gives investors time to look through the banking reporting to learn about the strength of the Australian financial system.
This season is particularly important, as it covers the coronavirus period, where we saw spikes in unemployment and deferred mortgage and business lending.
So far, we are about half of the way through this reporting, with ANZ and Westpac having reported, and with NAB and Macquarie Bank still to report.
ANZ reported results that were pretty much bang-on analysts’ expectations.
Cash profits dropped by 42 percent, while net profits fell be 40 percent. This was due to a big increase in credit impairment charges, which came in around $2.7 billion.
Profits before credit impairment charges at ANZ were down by 15 percent, while income for the year dropped by 6 percent. The bank’s net interest margin fell to a paltry 1.59 percent for the period.
Following the drop in profits, ANZ has cut their final dividend to 35 cents per share, which will take the total dividend per share to $0.60 per share, well below the $1.60 paid in 2019.
CEO Shayne Elliot stated that the virus made it difficult to predict what 2021 would hold, but also that “we are in excellent shape to navigate whatever challenges emerge,”
Westpac’s results were also broadly in-line with what most analysts were expecting, but definitely below some of the more optimistic expectations.
Westpac’s statutory net profits fell 66 percent to $2,290 million, while cash earnings fell 62 percent to $2,608 million.
Their net interest margin dropped by four basis points to 2.08 percent.
The company has declared a final fully franked dividend of 31 cents per share.
Westpac’s results were impacted by an increase of $2.2 billion in impairment provisions, as well as a $1.3 billion hit from AUSTRAC fines.
Excluding notable items profits fell by 34 percent to $5,227 million. Total deferred loans sit at $17.6 billion, down from a peak of $64.8 billion.
Westpac Group CEO Peter King stated that “2020 has been a particularly challenging year and our financial result is disappointing”.
The reports provide us some clues towards the health of the Australian financial system, with some key takeaways for Australian investors.
The first, and perhaps most important of these, is that net interest margins (NIM) remain under pressure. The era of extremely low interest rates has hampered the banks’ ability to maintain strong NIM and this is unlikely to change any-time soon.
Lower net interest margins for the banks will be a drag on future bank earnings, and indeed we have seen some analysts start to lower their future earnings forecasts as a result.
The other major take away is that the amount of deferred loans is starting to come back down, particularly for residential mortgages. In fact, of the home loans that had participated in ANZ’s COVID-19 deferral program, 79 percent have returned to full payment. Westpac’s deferred loans remain a little higher, with around 70 percent of their granted mortgage deferrals back to full payments.
Regardless, the massive drop in deferred loans is a positive sign, that might suggest that loan-book losses related to the coronavirus may not get as bad as anticipated, although it is worth noting that the virus is far from over.
The expectations for the banking reporting were pretty weak and the results have so far matched the weak expectations. Moving forward we are likely to see banking profitability remain subdued for some time, especially with interest margins likely to remain weak.
However, the real positive for the banks is that we so far haven’t seen the massive wave of defaults, foreclosures, and property market collapses that some had expected to materialise out of the coronavirus.
There are still reports from the National Australia bank and Macquarie Group to come this week:
The National Australia Bank (NAB.AX) will report their full-year results on Thursday 5th of November.
Macquarie Group (MQG.AX) will report their half-year results on Friday the 6th of November.
If you are interested in finding out more about the Australian banks, or ASX-listed stocks in general, please don’t hesitate to contact an Emerald Advisor on 03 8080 5777 or at advisors@emeraldfinancial.com.au