When do banks report their profits?
Companies report their annual profits soon after their financial year end. The CBA has a 30 June year end and has therefore already reported their results back in August. The other 3 major banks (Westpac, ANZ and NAB) all have a 30 September year end and report their results in October and November.
How are banks expected to perform this year?
CBA results for the year ending 30 June 2016 were broadly inline with the market’s expectations. Their earnings per share (EPS) grew by 2% and their dividend remained the same as in 2015. This dividend represents a gross yield of 8.2% based on CBA’s share price as at 27 October 2016.
NAB recently also reported their annual results and these were also broadly in line with the market’s expectations. NAB’s cash earnings per share dropped by 2% but they also maintained their dividend at 2015 levels, representing a gross yield of 10.2% based on their share price as at 27 October.
The remaining two major banks, ANZ and Westpac, have yet to report. The market expectation for both banks is that their earnings per share and dividend will remain in line with 2015.
What is the outlook for banks?
Australian banks performed very strongly coming out of the GFC in the period from March 2009 to March 2015. Since then, they have pulled back as a result of difficult global economic conditions – in particular slowing growth and an unprecedented period of record low and in many cases negative official interest rates. Some key considerations that could impact the outlook for banks include:
Capital requirements: To meet higher prudential capital reserve requirements, many banks have had to hold more capital aside as well as raise additional capital through the issue of hybrid securities and rights issues. Further capital raising may be required over the next 12 months which is likely to lower earnings growth in the short to medium term.
Credit growth: Credit growth is slowing, in large part due to new tighter lending standards particularly in relation to investment property loans.
Net interest margins: This is the difference between the average rate that the bank lends money at and the average interest rate they pay on deposits. Most banks did not pass on the full amount of the most recent RBA rate reduction in an attempt to protect and improve their net interest margins. We expect this will help to offset some of the other earnings pressures facing the banks.
Late last year, we pro-actively reduced our client’s exposure to the major banks to seek more attractive opportunities in other sectors. That said, over the next 2 years, we expect banks will continue to provide a strong and stable dividend return but with a more modest level of capital growth.
