Analysts are forecasting that weak credit growth and the initial impact of the royal commission will drag 2018 profits for the big four banks to roughly $29 billion. This would represent an approximate 7 per cent decline from the $31.5 billion that they reported last year.
Included in the forecast 7 per cent reduction in profitability are likely to be billions of dollars in provisions for compensation payments, legal fees, and other expenses linked to the Hayne royal commission.
The big banks have so far disclosed that they have set aside $1.3 Billion to cover the expected costs of the royal commission scandals as part of this year’s earnings provisions. However, according to Morgan Stanley analyst Richard Wiles, this is likely to be followed by a forecast $2 Billion of provisions in 2019, and a further $875 Million of provisions in 2020.
The banks’ woes haven’t started with this year’s royal commission, they have been underperforming the market for some time. The ASX200 Bank index accounted for around a third of the ASX200 index at the bank peak in 2015, but it now accounts for less than a quarter.
The performance of the Australian banks has been impacted over the past few years by stagnant house prices, slowing credit growth, and rising funding costs.
UBS analyst Jonathan Mott warned clients not to expect a positive surprise from the upcoming bank earnings reports. Mr Mott indicated that there is little incentive for the banks to report well whilst they are under such public, political, and regulatory scrutiny.
The major Australian banks will all report earnings results or give earnings updates over the next fortnight.
First off the reporting rank will be ANZ, which reports full-year results on Wednesday. It is expected to report a 13 per cent drop in profit to about $6.2 billion for the year. They are however expected to keep the dividend flat at 80 cents a share. ANZ previously flagged an $824 Million hit to its full-year profit due to impairments and one-off expenses.
NAB will report its full-year results on Thursday. It is forecast to report a 16 percent fall in cash profit to about $5.7 billion. Despite this, analysts are forecasting the dividend to remain unchanged at 99 cents a share. NAB has indicated that its profit for the full-year would be slashed by a further $314 million due to customer remediation expenses.
Macquarie Group will deliver half year results on Friday, and the company has said it expects profits to be broadly in line with last year’s $1.2 billion in earnings. Macquarie Group is less tied to the domestic Australian housing market, and with the majority of its revenues earning overseas – it is likely to see less of an impact from the Royal Commission.
Westpac is forecast to deliver a full-year profit of about $8 billion next Monday, down around 1 percent from the prior year, and keep its final dividend unchanged at 94c a share.
CBA is expected to deliver a first quarter trading update at its annual general meeting on Wednesday next week.
Regardless of what is happening in US markets and around the world, the current bank reporting season will certainly be an important one for our market. If these bank dividends can be maintained, the current yield of the banks makes them quite attractive and could help lift our domestic share indices off recent lows.