Judging by the negative reaction to the interim profits from the ANZ and NAB this week, it was a disappointing half way reporting season.
ANZ and NAB shares got the thumbs down from investors and the shares fell after the results were released even though they were better than expected.
Westpac saw a more positive reception with a 5% rise on Monday after the result was released but that was undermined by the latest allegations from ASIC against the bank about insider trading in the way a big finance deal was to be protected in money markets.
But in reality the three results – and that from industry leader, the Commonwealth in February – were good – not as upbeat as say four years ago, but certainly better than the Covid-damaged interims a year ago.
And they had to be because of the amount of stimulus and support for banks and the economy from governments and regulators.
If the results had not revealed significant improvements and higher dividends than a year ago, then all the tens of billions of dollars in support would have been for nothing.
And the banks have had some significant support – they have borrowed $100 billion from the Reserve Bank under its Term Funding facility with another $100 billion on offer until June 30 (and these are three-year loans that expire in 2024 which is the year when we will see some real pressures on the banks and some of the customers).
The cash rate is 0.10% and will be maintained until 2024 at least. That will protect net interest margins for the next three years.
Cash profits of the big four jumped 62% in the March half year to $13.8 billion.
The Commonwealth led the way with cash earnings for the half year of $3.89 billion and an interim dividend of a large $1.50; Westpac had cash earnings of $3.54 billion and an interim dividend of 58 cents a share; NAB reported cash profits of $3.34 billion and a 70 cents a share dividend and the ANZ’s cash earnings were $2.99 billion and the dividend was 60 cents a share.
In its usual end of reporting season assessment of big bank profits, accounting firm EY said that the Australian major banks’ half year results “reflect a more positive operating environment than might have been expected this time last year.”
“Fears of large-scale defaults on housing and business debt have eased with the steady economic recovery. While the banks still face an increase in nonperforming loans as a result of the economic downturn, it appears at this stage that the rise will be modest.
“Aggregate cash earnings improved, following the significant credit provisioning undertaken in the first half of 2020. Organic capital generation and a reduction in risk-weighted assets (RWA) have further strengthened the banks’ capital position and have ensured substantial buffers against potential future shocks.”
EY said however bank earnings and profitability “remain under pressure in an environment of ultra-low interest rates and aggressive mortgage competition.”
“Net interest margin (NIM) was declined 6 bps. NIM is expected to remain an ongoing challenge for the banks, given low interest rates and highly supportive monetary conditions that are likely to continue over the medium-term. Average return on equity (ROE) improved to 10.4%, from 6.5% pcp.
(For 2019-20, the big four banks cash earnings totalled $17.4 billion and return on equity was 6.7%, the lowest for 30 years).
And looking to the future, EY said that despite the stronger economic outlook (the RBA revised growth, jobs and inflation forecasts higher this week), “risks are still elevated.”
“The full impact of the economic downturn on asset quality is still playing out, with forbearance programs and income support measures only recently drawing to a close.
“Uncertainty remains around the impact of domestic COVID-19 outbreaks, new variants of the virus and a delayed vaccination rollout that could prolong the pandemic and slow down the economic recovery,“ EY wrote in the report.
EY said the banks’ immediate priorities continue to be managing credit risk and capital and continuing their simplification and digitisation strategies to boost efficiency (ie cut costs).
“They also have a heightened focus on the environmental, social and governance (ESG) agenda, with the pandemic concentrating attention on sustainability.”