- We preview the 1H23 reporting season, with expectations of solid-to-strong 1H23 growth but with a weakening earnings outlook from 2H23 onwards.
- Of the retail-skewed banks, we view WBC as having a greater risk/reward profile than CBA (highest quality and ROE, stretched valuation, lowest yield). Of the business-skewed banks, NAB has higher ROE than ANZ, but ANZ has greater valuation support albeit with greater M&A risk.
Likely 1H23 reporting season thematics
Net interest income generates c.80% of revenue for the sector. APRA has released monthly credit and deposit data (with ANZ having the stand-out growth). Hence, the key uncertainty is the net interest margin (NIM) (+/-5bps NIM = +/-5% cash EPS). The rise in the average RBA cash rate in 1H23 should provide a sugar hit to NIM. However, watch for the trajectory – CBA and BOQ said their NIMs peaked in October – as price competition, deposit switching, higher wholesale funding costs, and weakening terminal cash rate expectations impact the outlook.
The banks will publish first-time Common Equity Tier 1 (CET1) capital ratios under APRA's revised capital adequacy framework. Based on indications from the banks, we expect meaningful CET1 ratio increases that indicate surplus over the targeted minimum of 11% (post-dividends). This provides opportunity for additional capital management and/or further insulation against a weakening economy.
We expect cost inflation will be evident, both through opex (e.g. wage growth and vendor inflation) and upward normalisation of credit impairment expenses (note BOQ indicated business lending asset quality deterioration in its 1H23 result).
Our DPS forecasts are around or below consensus expectations, albeit still targeting solid increases. On our forecasts and at current prices, ANZ is yielding 6.5%, CBA 4.5%, NAB 6.0%, and WBC 6.7% (all fully franked).
Forecast Changes
Earnings and dividends adjusted mostly for moderated NIM outlook (revised RBA cash rate and swap rates) and updated asset/liability growth (re APRA data).
CET1 capital ratios adjusted upwards to reflect potential benefit of APRA's revised capital adequacy framework applicable from Jan-23.
Investment Insights
ANZ (HOLD): Recent loan and deposit market share growth (but at what returns?). Lowest low rate fixed rate loan exposure. Leading institutional banking franchise. Greater diversification into US$ and NZ economy. Valuation support and attractive yield. Cautious re M&A (NOHC implications) and tech transition to a digital bank.
CBA (HOLD): The largest and highest quality bank, with a loyal retail investor and customer base. Highest return on equity (supported by buybacks) and lowest cost of equity. Leading technology. Cautious re: largest fixed rate loan cliff exposure, weakest valuation support, and lowest dividend yield.
NAB (HOLD): Recent slowing of loan growth. Leading SME relationship banking franchise. Increased simplification and improving digitisation in personal banking. Meaningful improvement in ROE that is in excess of cost of equity. Attractive yield and buyback. Cautious re step-up in costs and weaker valuation support.
WBC (ADD): Greatest potential improvement in ROE (vs relatively low risk profile) via cost-out targets, business exits, rates leverage, efficiency lift (including regulatory capital reduction), and lifting loan growth. Valuation support and strong yield. Cautious re ability to deliver transformation and market share improvement.
Catalysts
1H23 results: ANZ (5 May), NAB (4 May), and WBC (8 May). CBA Q1 trading update (9 May). Key economic data releases and RBA policy cash rate changes. Monthly APRA and RBA lending and deposit balance and interest rate data releases. ACCC, Federal Treasurer, and Queensland Government decisions re: Suncorp Bank acquisition by ANZ.
Risks
Interest and inflation rates. Credit risk (key considerations being unemployment and value of collateral). Competition for loans and deposits. Regulatory risk. Liquidity and funding risk. Execution, cost benefit, and scalability risks of digital bank transition. Cybersecurity.
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