Stocks’ Details

Australia and New Zealand Banking Group Limited

Increased Mortgage rates to support cost: Australia and New Zealand Banking Group Limited (ASX: ANZ) has recently announced the increase in its variable home loan interest in Australia to cover the rising wholesale funding cost, business performance, and market conditions. The bank has also signed an Enterprise license agreement with Atlassian to access their product suite in a bid to drive ahead of its agile-based transformation. In the face of housing sector slowdown in Australia, ANZ has managed to maintain its statutory Profit after Tax for the 1H FY2018 at $3.32 Bn, up 14% pcp. The bank has diverted the majority of its funds towards the higher performing business and has begun divesting from the non- core assets. The bank has however reported low Net Interest margin of 1.93% in 1 H FY18 compared to 2.00% in the previous comparable period. Moreover, ANZ has been taking drastic measures to streamline its business and create a simpler bank as it sold six retail and wealth businesses in Asia in the first half of the year, announced the sale of Australian Life Insurance business pertaining to tough market conditions and home-grown challenges. The banking sector in Australia has been in a tight spot from quite some time now with biggest banks such as ANZ coming under criminal prosecution for the alleged cartel conduct. Further, the political authorities are not pleased with the bank raising the mortgage interests and have called for breaking up the oligopoly.


ANZ Variable Home Loan Indices (Source: Company Reports)

Meanwhile, ANZ share looks better positioned than the competitors with the stock generating negative YTD return of just -0.17%. The stock gave a breakout from the resistance level of $27.84 and has maintained well above that level. A minor correction has been witnessed recently but the stock is holding on to its immediate support level of $28.29. ANZ is witnessing headwinds currently but the bank has been working aggressively to streamline its business, realign the operations and bring down the cost. We, therefore, maintain “Hold” on the stock at the current market price of $28.4.
 

National Australia Bank Limited

Challenges mount up while decent Asset Quality was reported in Q3FY18:National Australia Bank Limited (ASX: NAB) found itself in yet another scandal after corporate watchdog ASIC dragged the bank to the court, alleging that the entity has charged around $100 Mn from Superannuation members but failed to provide the service. After the Royal Commission issue, this is the latest fiasco impacting the bank directly. The difficult Home sector in Australia and lawsuits have created an environment for pessimism against the Bank. However, the bank had posted sound third quarter trading numbers with unaudited statutory profit coming in at $1.65 Bn and revenue was up 1% on the back of growth in SME lending within Business and Private Banking, along with the significant contribution from the New Zealand Banking. On the other hand, the bank has been making progress on offering a simpler platform to the customers as it launched the new NAB mobile and internet banking capability. Asset quality in the third quarter remained sound with the ratio of 90+ days past due and gross impaired asset to gross loans and acceptance at 0.71%. NAB has declared 2018 interim dividend at 99 cents per ordinary share, franked to 100% and paid on July 2018.
 

Asset Quality (Source: Company Reports)

Besides this, the group disclosed its distribution payment of AUD 1.22350000 with dividend distribution rate of 2.0605 % per annum for NABPD - CAP NOTE 3-BBSW+4.95% PERP NON-CUM RED T-07-22 and it will be paid on October 08, 2018 with the record date of September 28, 2018. On the stock performance front, the stock has generated negative YTD return of 5.48% and fell in July after discounting the dividend paid. Since then, however, the stock has been inching higher on decent volumes. The stock has held its support level of $27.63 despite the recent flurry of negative developments and tough domestic market. Going forward, NAB may mitigate the short-term challenges and grow based on fundamentals; thus, we maintain “Hold” on the stock at the current market price of $27.87.
 

Commonwealth Bank of Australia

Rising Dividend:Commonwealth Bank of Australia (ASX: CBA) has recently informed the market that it will increase its variable home loan rates to cover the rise in funding cost. Following this, the bank stated that all variable home loan rates will increase by 15 basis points from October 04, 2018. Over the past six months, the bank has seen rising funding costs significantly, driven by a rise in the 90-days Bank Bill Swap Rate. These changes have increased the cost of providing loans to its customers. On the financial front, Net interest income for the bank came in 4.5% higher in FY18 at $18,336 Mn compared to $17,543 Mn in FY17. However, Net profit attributable to equity holders of the bank contracted to 6.0% to $9,329 Mn in FY18 against FY17 due to the number of one-time costs such as AUSTRAC Civic Penalty of $700 Mn, regulatory cost totaling $155 Mn associated with the Royal Commission and others and the acquisition of Aussie Home Loans and eChoice. Based on the performance, the company declared the fully franked final dividend of $2.31 per share bringing total dividend for the year ended 30 June 2018 to $4.31, an increase of 2 cents over the previous period. The bank has a deep penetration in the Australian Banking industry, serving 16.1 Mn customers in addition to 6.5 Mn digital customers. With its 1,267 branches and 4,253 ATM branches, we believe that CBA is playing on sound infrastructure to achieve growth by simplifying the customer-based operations.


Dividend Trend (Source: Company Reports)

In the meantime, the stock has generated negative YTD return of 12.57% owing to challenging environment and legal proceedings. However, the chart structure of the stock price looks strong as the long-term support level of $68.03 has been held on to. The momentum strength indicator (RSI) is rebounding from the lower band and looks promising. We recommend “Buy” on the stock at the current market price of $70.51, expecting that the bank would continue to perform better in the upcoming period.
 

Westpac Banking Corporation

Settling Disputes: Westpac Banking Corporation (ASX: WBC) followed other big banks in increasing the variable Home Loan interest rates owing to a consistent increase in the wholesale funding costs. In order to do this, the bank also increased its all variable mortgage rates by 14 basis points that take effect from September 19, 2018 and will apply to new and existing customers. The bank is on the verge of settling the case with ASIC and pay $35 Mn in a penalty for deviating from the National Consumer Credit Protection Act. On the financial front, its net interest margin for the third quarter ending June 2018, has reduced to 2.06% compared to 2.17% in 1H18, due to higher funding costs and lower contribution from Group’s Treasury. As WBC has increased the interest rate to cover the wholesale funding cost, we presume that the minor drop would be covered in the quarters to come. The credit quality of the company remained sound with the level of an impaired asset being stable and no individual impaired loan went over $10 Mn in the quarter. Meanwhile, the stock has reflected the challenging environment for the Bank generating negative YTD return of 10.91%. The price was hovering around its immediate support level of $27.685 and next support looks to be $27.40. Given the increased mortgage cost and settling down the disputes, the Bank is better positioned for growth as it focusses on the core operations. We recommend “Buy” on the stock at the current market price of $27.8 expecting that the company would continue to improve its NIM despite tough conditions while it looks to be the cheapest in terms of price to earnings scenario.
 

Stock Price Change Comparative Chart (Source: Thomson Reuter)

 
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