A $10 billion banking bonanza

With the release yesterday morning (Thursday May 8) of the National Australia Bank results for the six months to March 31, we have now had a the chance to get a very clear reading on how three of our big four banks are travelling. ANZ and Westpac have also reported for the same period in recent days (our biggest bank, Commonwealth Bank, runs on a different reporting cycle). With listed banks represents roughly 30% of the ASX 200 and many Eureka Report subscribers depending on bank stocks for income, the ongoing progress of these stocks is crucial. In general the results were broadly on target, with all three banks meeting the market’s expectations. But there are significant developments at each bank well worth knowing. Below we reproduce an edited version of the results assessment for ANZ, NAB and Westpac from the specialist daily banking newsletter Banking Day. (Managing Editor James Kirby)

NAB protects business margins

There are some tentative signs of improving business confidence, although credit demand is yet to respond, according to National Australia Bank’s chief executive, Cameron Clyne, at the release of the group’s results for the half-year to March 2014.

Overall, NAB’s business lending franchise has seen its net interest margin decline half-on-half by 7 basis points, from 2.30% in September 2013 to 2.23% in the six months to 31 March 2014.

In the same period, the business loan portfolio shifted towards higher quality, with the proportion of “investment grade equivalent” loans on NAB’s books lifting from 45 to 48%.

Clyne said that despite this active de-risking, NAB was still, out of the major banks, “the most open for business during the GFC”. In recent times the bank has again started noticing that “some of the risk appetite of its customers wind back”, possibly because people are now looking at the impacts on capital, and the nature of the risk they’re taking on with loans.

Joseph Healy, NAB’s group executive of business banking, told analysts the big priority for NAB has been margin protection, given the relative lack of volume in the market.

“In recent times we’ve seen an easing of the margin pressure, but it’s too soon to ‘call that out’ as sustainable,” said Healy.

Healy said the trend has been flat quarter to quarter. “Margin management has been a big priority for us so revenue impact has not been material,” he said.

He added that the bank’s Asian lending was largely trade related, supporting Asian Australian and New Zealand businesses moving into Asia.

NAB results at a glance

National Australia Bank reported a net profit of $2.8 billion for the six months to March – an increase of 15.8% over the previous corresponding period but a reduction of 1.1% since the September half. On a cash basis the bank reported a net profit of $3.1 billion – an increase of 8.5% over the previous corresponding period and an increase of 4.8% over the September half. The most significant factor in the improved result was a big reduction in the bad and doubtful debt charge.

Income: Net interest income was up 3.6% on the previous corresponding period to $6.8 billion. Other operating was up 0.3% to $2.6 billion. Total operating income rose 2.6% to $9.5 billion.

Expenses and cost-to-income: Operating expense growth exceeded income growth by a considerable margin. Expenses rose 11.6%, compared with the previous corresponding period, to $4.4 billion. The cost-to-income ratio has risen from 41.6% in the March half last year to 43.5% in the September half and 45.4% in the latest half.

Impairment charges and credit quality: The charge for bad and doubtful debt was half that of the previous corresponding period – down from $1.2 billion in March last year to $528 million in the latest half. The bad debt charge represented 0.2% of gross loans and acceptances – down from 0.4% in the previous corresponding period. Impaired assets as a percentage of gross loans and acceptance fell from 1.74% to 1.52%.

Return on equity and assets: ROE (on a cash basis) was unchanged, year on year, at 14.6%. ROA was also unchanged at 0.74%. ROE on a statutory earnings basis was a low 13.3%.

Earnings per share: Cash earnings per share rose 7.8% over the previous corresponding period to $1.33 a share.

Dividends: The bank declared a dividend of 99 cents a share, compared with 97 cents a share in September and 93 cents a share last March. The dividend payout ratio is 74%.

Margin: Net interest margin has fallen from 2.03% in March last year to 2.02% in September and 1.94% in the latest half.

The divisions: NAB’s biggest division, Australian Banking, contributed $2.5 billion of the bank’s $3.1 billion of cash profit – more than 80% of the total. The division’s earnings rose 1.2%, compared with the previous corresponding period but fell 0.9% from the September quarter. UK Banking produced the strongest growth, with cash profit up from $33 million in March last year to $73 million in the latest half. Great Western bank in the US was up 14.5%, New Zealand was up 3.4% and NAB Wealth was down 0.6%.

Markets share: Australian mortgage share rose from 15.2% to 15.4% over the 12 months to March, while Australian business lending fell from 22.4% to 21.6% over the same period. Household deposit share grew from 14.6% to 14.8% and business deposit share grew from 20.5% to 20.6%.

Capital: The common equity tier one capital ratio was 8.64%, compared with 8.22% in the previous corresponding period.

Westpac’s ‘tilt’ is delivering growth at a cost

Westpac is achieving its goal of growing market share in lending markets in a sustainable way, chief executive Gail Kelly said this week.

However, analysts at the bank’s interim financial results briefing wanted to explore the margin impact of the push for growth, putting questions about interest rate discounting, broker incentives and other competitive initiatives.

Since the middle of last year, when Kelly announced that the bank was making a “tilt to growth”, Westpac’s mortgage portfolio growth rate has gone from 0.7 times system growth to 0.9 times system.

At the end of March Westpac had $338 billion of Australian mortgages on its books – an increase of 5% over the previous corresponding period.

Kelly said the aim was to get the growth rate up to system growth in the second half of the year.

In other lending markets, Australian credit card share has increased from 22% in December last year to 22.5% now, and personal loan share has grown from around 26.8% to 27.3% over the same period.

The bank has achieved these market share gains by increasing its “share of voice” with more advertising, adding more home lenders, beefing up its training programs and giving lenders more credit authority.

Westpac chief financial officer Peter King said that the bank’s asset spread (which is an element in the net interest margin) was down seven basis points over the March half.

King said this was largely a result of contraction of mortgage spreads caused by competition and customers moving from variable rate loans to fixed (which have lower margins).

He said that lower cost of funds over the same period offset most of the mortgage spread contraction.

Kelly said she was comfortable with the decline in “front book” mortgage margins (the margin on new loans).

On the business lending side, the loan book grew by 5%.

King said the margin outlook was neutral, with ongoing competitive pressure on lending being offset by lower funding costs.

Kelly said: “Our focus on tilting to growth is delivering and this is expected to continue in the second half of the year.”

Westpac results at a glance

Westpac reported a net profit of $3.6 billion for the six months to March – an increase of 10% over the previous corresponding period and an increase of 5% over the September half. On a cash basis the bank reported a net profit of $3.8 billion – an increase of 8% over the previous corresponding period and 6% up on the September half.

Income: Net interest income (on a cash basis) was up 4% on the previous corresponding period to $6.7 billion. Other operating income was up 9% to $3.2 billion. Total operating income rose 5%.

Expenses and cost-to-income: Operating expense growth exceeded income growth. Expenses rose 6% to $4 billion. The cost-to-income ratio rose from 40.9% in March last year to 41.2% in the latest half. The bank said that if foreign exchange impacts and costs related to the acquisition cost of Lloyds’ Australian loan portfolio were taken out of the equation, expenses rose only 1.7%.

Impairment charge and credit quality: The bad debt charge of $341 million was down 22% on the previous corresponding period. The ratio of impairment charges to loans fell from 17 basis points to 12 bps. The ratio of impaired assets to gross loans fell from 82 bps in March last year to 51 bps in the latest half. Mortgages with repayments overdue by 90 days or more fell from 57 bps to 48 bps.

Return on equity and assets: ROE (on a cash basis) rose 43 bps from 16.05% in March last year to 16.48% in the latest half.

Earnings per share: Cash earnings per share rose 7% over the previous corresponding period to $1.21 a share.

Dividends: The bank increased the interim dividend by four cents to 90 cents a share. Its dividend payout ratio is 74.2%.

Margin: Net interest margin fell from 2.19% in March last year to 2.12% in September and then to 2.11% in the latest half.

The divisions: The bank’s biggest division, retail and business banking, made a cash profit of $1.25 billion for the half, compared with $1.1 billion in the previous corresponding period. The division contributed 33.2% of group profit. New Zealand produced the strongest growth, with a 33% increase in profit over 12 months. St George Bank reported a 12% increase in profit, BT Financial Group was up 21% and Westpac Institutional Bank fell four%.

Market share: Westpac’s Australian mortgage portfolio grew by 5% over the 12 months to March and its market share remained steady at 25%. Credit card share increased from 22% to 23%. Customer deposits grew by 8% and share was steady at 23%. Business deposit share fell from 21% to 20%. In New Zealand lending and deposit share was unchanged.

Capital: The common equity tier one ratio fell from 9.1% in March last year to 8.8% in the latest half.

Business banking a weak spot for ANZ

Australian business banking was an underperformer for ANZ during the March half, with the business held back by weak loan growth, pressure on corporate debt margins and a couple of big impairment charges.

Corporate and business banking contributed $546 million of the $1.5 billion of cash profit reported by the Australian division. The corporate and business banking result was 7% down on the previous corresponding period and unchanged from the September half.

There was no growth in corporate and business banking revenue over 12 months.

The corporate banking group was responsible for a large increase in impairment charges. The bank’s chief financial officer, Shayne Elliott, said the increase, from $13 million in March last year to $70 million in the latest half, was due to two corporate exposures. These debts contributed to a 23% increase in the credit impairment charge for corporate and business banking.

The corporate loan book contracted by 2% from the previous corresponding period, the Esanda finance company book was unchanged, the regional business loan book grew 5% and the business banking (middle market book) grew by 1%.

The one bright spot was small business banking, whose loan book increased by 16%.

ANZ has made a big push in the small business market. In March the bank announced that it would allocate an additional $2 billion in lending to small business over the next year.

Elliott said the bank expected to see its investment in the small business segment produce more growth in assets.

He said there was an increase in mergers and acquisitions activity, which would provide some growth in the middle market.

And he said deposit margins were improving.

ANZ results at a glance

ANZ reported a net profit of $3.4 billion for the six months to March – an increase of 15% over the previous corresponding period and an increase of 2% over the September half. On a cash basis, after adjusting for non-core items, the bank reported a profit of $3.5 billion, an increase of 11% over the previous corresponding period.

Income: Net interest income was up 8% on the pcp to $6.7 billion. Other operating income was up 2% to $2.9 billion. Total operating income grew by 6%.

Expenses and cost-to-income ratio: Operating expenses also grew by 6%, increasing from $4 billion in March last year to $4.3 billion in the latest half. The cost-to-income ratio of 44.3% was down two basis points on the pcp.

Impairment charge and credit quality: The credit impairment fell from $599 million in March last year to $528 million in the latest half – a reduction of 12%. The impairment charge represented 0.21% of average net advances – down from 0.27% in the previous corresponding period. The value of gross impaired assets fell by 23%. The bank described the risk environment as “benign”.

Return on equity and assets: ROE (on a cash basis) was unchanged from the previous corresponding period, at 15.5%. The return on assets was 0.96%, compared with 0.97% in March last year.

Earnings per share: Earnings per share rose 10% over the pcp to $1.28 a share.

Dividends: ANZ declared an interim dividend of 83 cents a share – an increase of 14% over the first half of the group’s 2013 first half result.

Margin: The net interest margin fell from 2.25% in March last year to 2.19% in September and then to 2.15% in the latest half. The bank said the main pressure point was corporate lending.

Funding: Customer funding was stable at 62% of total bank funding. More favourable wholesale funding costs added one basis point to the net interest margin. $13.1 billion of term wholesale debt was issued during the latest half. The bank said funding conditions were benign and that, as older wholesale funding matures, the average cost of funds would continue to fall.

The divisions: The bank’s biggest division, Australian retail and commercial banking, contributed 42.9% of cash profit. The Australian division’s profit increased 5% over the previous corresponding period. New Zealand provided the strongest growth, with a 38% increase in profit. International and institutional banking reported a 14% increase in profit and global wealth was up 11%.

Market share: ANZ’s mortgage loan portfolio grew by 7% over the 12 months to March and its market share increased from 14.8% to 15% over the same period. The Australian mortgage book exceeded $200 billion for the first time. Customer deposits grew by 7% and share increased from 15.1% to 15.2%.

Capital: The common equity tier one ratio fell from 8.5% in September to 8.3% in March. The bank confirmed that its target for CET1 was 8.5% to 9%.

The slippage in the group’s CET1 ratio is likely to see it lag its peers through this reporting season, according to Westpac analysts. ANZ’s chief executive officer, Mike Smith, was not concerned, noting that capital levels would grow organically in the lead-up to the introduction of the higher loss-absorbing capital requirements for D-SIBs in 2016.

These reports were first published in Banking Day, between May 2, 2014 and May 9, 2014. www.bankingday.com. The comments published are not financial product recommendations and may not represent the views of Eureka Report. To the extent that it contains general advice it has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.