|Summary: The major banks are battling it out to win market share. With mounting pressure on revenues, analysts are picking ANZ and NAB as the majors who will be the biggest beneficiaries.|
Key take-out: Australian banks should continue to lead our stockmarket, in the absence of further global financial ructions.
Key beneficiaries: General investors. Category: Growth.
Almost a year and a half, and 175 basis points of interest rate cuts. And still no-one is borrowing.
Australians, large and small, personal and corporate, have taken to heart that old adage of “ne’er a borrower nor lender be.”
Even in ordinary times, that would be bad news for the banking sector. But add to the mix that banks have attracted the lion’s share of funds rotating out of cash and into equities. Given those enormous stock price rises have stretched valuations and diminished yields, it is little wonder most analysts are cautious now, worrying whether future earnings lifts can justify the prices.
The soothing news for investors, however, is that while lifting revenue in this environment will be a challenge, our banks are in a purple patch on almost every other front.
Funding costs have dropped, efficiencies are still being wrought from within, while relatively benign credit conditions and low impairments have combined to ensure modest earnings growth into the near to medium term.
In the absence of any further global financial ructions, Australian banks should continue to lead our stockmarket and dominate investor sentiment – if only because their dividend yields are still attractive. Longer term, however, share price growth will need to be driven by revenue gains.
There’s been a deluge of statistics dropped on the sector during the past week, from the Australian Bureau of Statistics and the Australian Prudential Regulatory Authority, that have thrown up some startling trends among our major financial institutions.
What do you do in a static market? You try to grab business from your competitors. Not surprisingly, in the banking world, market share has been elevated to a whole new level.
Among the big four banks during the 12 months to February, ANZ and NAB emerge the clear winners when it comes to market share, Westpac has marked ground while Commonwealth Bank has retreated on almost every front, an interesting trend given the surge early this year in CBA’s stock price.
The only area where the Commonwealth streaks ahead is in credit card growth. While the other three went backwards here, CBA surged into positive territory.
Credit growth stalls
When it comes to debt, Australians remain doggedly on the deleveraging train.
It was already slow, but credit growth backed off even more in February. At just 0.2%, for the month, it slowed to 3.4% for the 12-month period, down from 3.6%.
Housing credit – the most important market segment for each of our major banks – fell to a new 36-year low. (The figures have only been collated for 36 years, hence the continued reference.)
Despite the best intentions of the Federal Government to boost competition, particularly from credit unions and building societies, the major banks continue to dominate housing. Even Macquarie Group’s recent incursion – linking with Mark Bouris from Yellow Brick Road – has yet to make an impact.
The big four banks still hold 83% of all Australian home mortgages. Extraordinarily, that is exactly the level of a year ago. The only difference is a slight reshuffling in share between the banks. The two giants, CBA and Westpac, have given up a few points. NAB and ANZ have gained.
Business lending went backwards for the month, although it remained in the black for the year at 2.3%. Meanwhile, business deposits for the year shrank, while personal loans grew marginally in February but not enough to pull them out of negative territory for the 12-month period (-0.3%).
Except for investment properties
Mortgage lending growth may be at an all-time low. But lending for investment properties is accelerating sharply, indicating the almost complete absence of borrowers for owner occupied dwellings.
Investment housing lending grew 6% as investors sought out new investment avenues and switched out of cash. Equities, it seems, haven’t been then only beneficiaries. Tight rental markets have added to the allure.
Risk and capital
While the general feeling is that credit conditions are relatively benign, Macquarie analysts this week pondered the proposition of more stringent prudential controls.
They found that if tighter risk weightings on mortgages were applied, the major banks would be short of capital.
There is no suggestion this is likely. But as APRA chairman John Laker recently noted, the capital requirements of our banks are more nuanced and complex than simply applying minimum capital requirements.
Given its dominance in the mortgage market, this may partly explain CBA’s reluctance to lend cash and build a bigger capital base, thereby letting go of market share. CBA and Westpac, the other big mortgage lender, between them last year accumulated a $30 billion surplus in deposits over loans. That’s extraordinary.
Macquarie also called into question one reason banks have outperformed the market in recent times – the prospects of a capital return – arguing that at this point, capital returns may be imprudent.
From a regulatory viewpoint, both Sweden and Hong Kong have imposed a minimum 15% risk weighting on mortgages, while Switzerland has ordered its banks to hold an extra 1% of risk-weighted capital linked to mortgages.
Given more than 58% of mortgages held by our four majors has a risk weighting of more than 15%, the issue could become a sensitive regulatory topic.
Macquarie found NAB fares the best on its mortgage risks, followed by CBA and ANZ, with Westpac bringing up the rear.
Long the weak link in our banking system, smaller and regional banks have bounced back. Impairments are declining. As a proportion of loans, the regional’s (Suncorp, Bendigo, and Bank of Queensland) non-performing loans are still around twice the level of the majors.
But this has been falling sharply since September 2011, particularly at Suncorp, the worst-affected regional. Macquarie’s share of non-performing loans also has dropped significantly during the same period.
Ask half a dozen brokers which banks to buy and which to sell, and you’ll get half a dozen conflicting answers.
Given the average price earnings ratio for the sector is about 13.7, none of them are particularly cheap. But almost every analysis of the sector projects dividends into the next year or further of well in excess of 5%.
With interest rates tipped to, at worst, remain at historic lows for the remainder of this year, the banks remain an attractive investment. And the recent correction on the domestic market only enhances their allure from an investor perspective.
But growth is the overriding concern, particularly for the medium to longer term. Given the depressed level of business lending in recent years, that is the sector most likely to rebound, particularly given the turnaround on the domestic stockmarket.
The two banks likely to be the biggest beneficiaries here are ANZ and NAB. ANZ clearly has been the most aggressive bank in the market, closely followed by NAB, although NAB has a far greater market share in business lending.
Both banks now vie for the honour of the most loved in the sector. While many analysts believe ANZ the cheapest, NAB wins hands down as the most popular, with more analysts recommending it a buy.
Commonwealth and Westpac’s heavy reliance on the housing market will possibly constrain future growth, while the housing market remains sluggish. But housing loans are safe, explaining the pair’s low level of non-performing loans.
After its enormous run to record levels a month ago, CBA has emerged as the least loved among our banks, including regionals, with more sell recommendations as analysts question the viability of CBA’s stretched valuations.