Australia Banks Set for ‘Messy’ Earnings After Misconduct Probe

(Bloomberg) -- Australia’s biggest banks are set for a “messy” earnings season as they grapple with a slumping housing market and the mounting costs of compensating customers for years of wrongdoing.

With the banks selling assets -- including financial advice and wealth management units -- the need to potentially set aside more money to remediate customers, and uncertainty around possible increased capital requirements for their New Zealand units, investors are likely to be more focused on the outlook for where growth will come from.

“Expect another messy set of numbers by the banks given the impact of asset divestments, remediation charges and Royal Commission expenses,” UBS Group AG analysts led by Jonathan Mott wrote in a note earlier this month. “The underlying trends are likely to remain very soft and deteriorating.”

The big four banks have underperformed the benchmark index as an inquiry into misconduct in the financial industry unearthed a string of scandals and the housing boom turned to bust. The S&P/ASX 200 Banks Index has fallen 11 percent since the start of 2018, compared with a 3 percent gain in the benchmark. The Reserve Bank of Australia said earlier this month that while bank profits remain healthy, the weaker property market and housing credit offer “greater-than-usual uncertainty” about their outlook.

Australia Banks Set for ‘Messy’ Earnings After Misconduct Probe

Here’s what analysts have to say about banks reporting first-half results in coming days:

ANZ Bank (Expected Pre-Market May 1)

  • JPMorgan: Expect net income excluding one-time items to fall on lower mortgage lending and higher bad debts; No capital management expected until life unit sale and New Zealand central bank clarifies capital rules
  • UBS: See slight improvement in NIM on mortgage repricing and shift toward lower- margin loans; Likely to retain strong capital position, although buybacks to be delayed amid New Zealand capital proposals
  • Morgans: Has derisked loan book last three years and has strongest CET1 ratio among peers; Facing fines from cartel allegations, most exposed to RBNZ regulatory plans
  • Bell Potter: Upside capital risk from sale of stakes in AMMB and Bank Pan Indonesia; Capital management flexibility is competitive advantage; Expect home loan repricing to be enough to offset higher wholesale funding costs
  • BI Preview

National Australia Bank (Expected Pre-Market May 2)

  • JPMorgan: Expect net income excluding one-time charges to rise 2.4% amid revenue growth, cost cuts; Underlying NIM to drop on delayed mortgage repricing. Likely to see dividend cut on New Zealand capital proposals and remediation costs
  • UBS: Facing flat net interest income amid increased competition, lower treasury and markets income; Higher-margin business lending seen as key driver over short term; Sees NAB maintaining dividend
  • Bell Potter: Capital position weakest among major banks; Remediation costs likely to weigh on earnings in medium-term; Dividend cut seen as “much-needed de-risking”
  • Morgans: Expect nominal dividend to be cut amid earnings headwinds, new CEO, stretched payout ratio and weak CET1 capital position; Least preferred in sector amid leadership changes, risk of credit rating downgrade
  • BI Preview

Westpac (Expected Pre-Market May 6)

  • JPMorgan: Expects cash profit down 11% on about A$1 billion in remediation and advice exit costs; Underlying cash profit seen up on increased revenue
  • UBS: Likely to see NIM decline on increased competition, customers switching to lower-margin mortgages; Facing extra charges from financial planner remediation, insurance claims and wealth management changes; CET1 ratio seen remaining strong
  • Bell Potter: NIM expected to fall amid lower contributions from Treasury and Markets; First-quarter trading update suggests underlying earnings momentum
  • Morgans: Sees concerns about asset quality and margin impacts of mortgage book as “overblown”; Impact of switch away from high-margin loans likely to have muted impact on return-on-equity once new rules changes introduced
  • BI Preview

Estimates

ANZ Bank:

  • 1H cash profit A$3.48b (2 analysts)
  • Interim div. A$0.815; BDVD est. A$0.80

National Australia:

  • 1H cash profit A$3.22b (4 analysts, range A$2.97b-A$3.37b)
  • Interim div. A$0.943; BDVD est. A$0.99

Westpac:

  • 1H cash profit A$3.97b (3 analysts, range A$3.61b-A$4.19b)
  • Interim div. A$0.94; BDVD est. A$0.94

Data

ANZ Bank:

  • Cash profit has missed estimates in 7 of past 8 semi-annual periods: Bloomberg data
  • 6 buys, 7 holds, 2 sells; avg PT A$27.99: Bloomberg data
  • Shares up 11.7% YTD vs ASX 200 Index up 12.6%
  • Short interest as percentage of equity float 1.28%; 52-week high 1.75% on Mar. 8

National Australia:

  • Cash profit has missed estimates in 4 of past 7 semi-annual periods: Bloomberg data
  • 9 buys, 6 holds, 1 sells; avg PT A$27.18: Bloomberg data
  • Shares up 5.7% YTD vs ASX 200 Index up 12.6%
  • Short interest as percentage of equity float 0.89%; 52-week high 1.80% on Mar. 19

Westpac:

  • Cash profit has missed estimates in 7 of past 8 semi-annual periods: Bloomberg data
  • 6 buys, 6 holds, 4 sells; avg PT A$27.98: Bloomberg data
  • Shares up 10.1% YTD vs ASX 200 Index up 12.6%
  • Short interest as percentage of equity float 2.16%; 52-week high 2.25% on Feb. 6

Related stories

  • Apr. 12: RBA Sees Sydney Property Falling Further as Household Risks Rise
  • Apr. 12: Banks May Get More Time to Raise N.Z. Capital Buffers, Orr Says
  • Mar. 23: Bank Watchdogs Get A$550 Million Boost in Australian Budget
  • Mar. 14: Commonwealth Bank Shelves Spinoff of Troubled Wealth Unit
  • Feb. 5: Australia Banks Surge as Misconduct Report Delivers ‘Soft’ Blow

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