The banking space in Australia is dominated by four banks, namely Westpac Banking Corporation, Commonwealth Bank of Australia, Australia and New Zealand Banking Group Limited and National Australia Bank Limited.
How are the share prices are performing?
Considering the performance of the stocks over a period of six months, Australia and New Zealand Banking Group generated the highest returns of 18.78%, followed by Commonwealth Bank of Australia with returns of 18.02%. Westpac Banking Corporation generated returns of 16.33% and National Australia Bank Limited generated the lowest return of 14.61%.
Performance in terms of CET1 Ratio
As compared to the Australian Prudential Regulation Authority (APRA) benchmark of 10.5%, two of the banks reported CET1 Ratio higher than the benchmark. CET1 Ratio for Australia and New Zealand Banking Group stood at 11.5% and that for the Westpac Banking Corporation stood at 10.64%. The other two banks reported a lower ratio. National Australia Bank reported a CET1 Ratio of 10.4%. The ratio was the lowest in case of Commonwealth Bank of Australia at 10.3%
Now let us have a detailed look at the banks’ recent updates:
Westpac Banking Corporation (ASX: WBC)
Westpac Banking Corporation (ASX: WBC) engages in the provision of financial services, including lending, deposit taking, payment services, investment portfolio management, superannuation and funds management, leasing finance, general finance, etc. The bank recently declared a distribution of $0.8214 over securities in Vanguard Australian Shares Index ETF (VAS). In another announcement to the exchange, the bank announced the appointment of Guilherme Lima as the Chief Executive for its new business division.
For the first half of financial year 2019, the bank reported a statutory net profit amounting to $3,173 million, down 24% on the prior corresponding period. Cash earnings during the period amounted to $3,296 million, down 22% on pcp and cash earnings per share went down by 23% to 96 cents. There was a decline of 5% in cash earnings, excluding major remediation and restructuring items of $753 million after tax. ROE for the period excluding the above items stood at 12.8%. The bank also declared an interim fully franked dividend of 94 cents per share.
The bank reported a common equity tier 1 capital ratio of 10.64%, above the APRA benchmark. The credit quality of the loan book remained sound during the period along with a strong balance sheet. Productivity remained a top priority during the period with around $146 million in cost savings.
Trends in CET1 Capital Ratio (Source: Company Reports)
The bank recently made an announcement for the movement of its wealth businesses into consumer and the business divisions.
On the outlook front, the management expects the bank to benefit from strong government investment and exports, in both resources and services. Alongside, there will be a number of challenges coming up in the form of a subdued GDP growth in Australia, slowdown of employment growth, slowdown of housing credit growth in the coming years and uncertain international backdrop affecting business investments.
The bank’s shares generated positive returns of 16.33% over a period of six months, YTD 14.95%. The stock was trading at a market price of $28.360, up 0.782% on 28th June 2019.
Commonwealth Bank of Australia (ASX: CBA)
Commonwealth Bank of Australia (ASX: CBA) offers financial services, fund management, broking services, life insurance, general insurance etc. The bank recently released an announcement to the exchange stating that it has ceased to be a substantial shareholder of RHIPE Limited. Another recent update was regarding the change in substantial shareholding of the bank in Fleetwood Corporation Limited. The bank’s voting power in the company increased from 4.96% to 6.10%.
During the third quarter of FY19, the bank reported a fall of 3% in the net interest income due to two fewer days in the quarter. Net Interest Income remained flat on a day-weighted basis. The period was marked by a strong capital and balance sheet position with the Common Equity Tier 1 ratio at 10.3%. The bank reported loan impairment expense amounting to $314 million in the quarter. Unaudited statutory net profit for the period was reported at $1.75 million. Cash net profit for the period was reported close o $1.70 billion. The bank witnessed a decrease in operating income by 4% due to unfavourable derivative valuation adjustment and weather events, seasonal impacts and rebase fee income. Pre-tax additional customer remediation provisions of $714 million impacted the profits.
CET1 (Source: Company Reports)
Overall, the third quarter was characterised by a strong balance sheet and capital position accompanied by sustained volume growth and better credit quality. Profit for the period was impacted by customer remediation provisions.
The stock of the company generated returns of 17.17% and 18.02% over a period of 3 months and 6 months, respectively. Currently, the stock is trading at a market price of $82.780, down 0.265% on 28th June 2019.
Australia and New Zealand Banking Group Limited
Australia and New Zealand Banking Group Limited (ASX: ANZ) provides banking and financial products and services to individual and business customers across 34 markets. In a recent announcement to the exchange, the bank updated that it will work with the Reserve Bank of New Zealand on independent reviews of its capital models and attestation process to assure that they are operating in a prudent manner.
The bank recently completed the sale of OnePath Life to Zurich Financial Services Australia, which was initially announced in December 2017. As a part of the deal, Zurich will provide insurance products to ANZ customers. The acquisition will help the bank fulfill its strategy to simplify the business and also provide ongoing support to customers looking for protection with life insurance solutions.
Financial Highlights: During the first half of financial year 2019, the bank reported a statutory net profit after tax amounting to $3.17 billion, down 5% on prior corresponding period. Cash profit from continuing operations amounted to $3.56 billion, up 2% on pcp. Return on equity increased 13 bps to 12% and cash earnings per share went up by 5% to 124.8 cents. The bank declared a fully franked interim dividend of 80 cents per share equating to a total payment of $2.27 billion to shareholders. During the period, the bank reported CET1 Ratio of 11.5%, up 45 bps on pcp.
During the first half, home loan demand in Australia slowed significantly. Other parts of the business performed well delivering consistent and diversified results for shareholders as well as customers. New Zealand also reported good performance during the period. Cost control was a highlight of the period with a decline in absolute expenses for another half.
Key Financial Information (Source: Company Presentation)
The overall performance of the bank in the second half was strong. On the outlook front, the company expects retail banking in Australia to remain under pressure for the future with intense competition, increased compliance costs and credit growth impacting earnings. New Zealand is performing well but the region might face similar challenges to Australia due to strong competition and a slowing Auckland housing market.
The bank’s shares generated returns of 1.19% and 8.94% over a period of 1 months and 3 months, respectively. Currently, the stock is trading at a market price of $28.210, down 0.599% on 28th June 2019.
National Australia Bank Limited
National Australia Bank Limited (ASX: NAB) provides banking services including leasing, housing and general finance, credit and access card facilities, international banking, wealth management services investment banking etc. The bank recently updated that it will release FY19 third quarter trading update on 14 August 2019. In another recent update on dividend distribution, the bank announced payment of an ordinary dividend of AUD 0.83 per security.
For the six months ended 31 March 2019, the bank generated cash earnings amounting to $2,954 million, up 7.1% on prior corresponding period. The highest amount of cash earnings were generated by the business & private banking division at $1,462 million, followed by Corporate & Institutional Banking division at $781 million. In terms of growth over pcp, New Zealand Banking division depicted the highest growth of 7.7%.
Operating expenses for the period were reported at $4,055 million, up 1.7% on pcp operating expenses of $3,989 million. During the period, the bank generated a net operating income of $9,218 million, up 1.4% and an underlying profit amounting to $5,163 million, up 1.2%, as compared to prior corresponding period. The CET1 ratio for the period also witnessed a rise at 10.4%.
Key Financial Metrics (Source: Company Reports)
On the outlook front, the bank might have to face a challenging operating environment due to modest GDP growth. Housing credit, regulatory changes, higher customer and community expections, intense home loan expections are other factors that can magnify the challenges for the bank. Despite the above factors, increased flexibility through capital settings to accommodate potential earnings volatility may help achieve the desired results in future.
The bank’s shares have generated positive returns of 14.61% over a period of 6 months, YTD 13.20%. The stock is currently trading at a market price of $26.720, down 0.112% on 28th June 2019.
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