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Our Take on the Big Four Banks

October 08, 2015 | Team Kalkine
Our Take on the Big Four Banks

Commonwealth Bank of Australia


 
On 11 September 2015, CBA announced the successful completion of the retail component of its pro rata renounceable entitlement offer and this attracted strong support from retail shareholders raising gross proceeds of approximately $ 1.5 billion. The offer attracted 50% participation by gross value and, combined with the successful institutional entitlement offer, the total proceeds raised are $ 3.6 billion. In total, the bank plans to raise $ 5.1 billion and the entire amount has been fully underwritten.


MFI Share (Source: Company Reports)
 
The bank has enjoyed great success in recent years along with the other major banks in Australia because of low interest rates, reducing charges for bad debt, strong growth in loans and a booming real estate market. According to the latest numbers from the Australian Prudential Regulatory Authority, the bank controlled 26.6% of Australia’s mortgage market in August 2015 reflecting the highest share followed by Westpac with 24.8%. The combined figure for the big four was just over 83% of the home loan market. It is easy to see why this bank is the biggest beneficiary of the real estate boom. However, there have recently been warning signs from Western Australia where investor loans were down 12.5% in July 2015. Moreover, the bank is bound to feel the impact of the resources sector as growth in China continues to slow.


CBA Daily Chart (Source: Thomson Reuters)
 
Under these circumstances, we feel that the stock is pricey and would not recommend an investment at the current time unless there is a pullback in price or some really encouraging new developments.
 

Australia & New Zealand Banking Group Ltd.



ANZ recently announced about selling of the Esanda dealer finance portfolio having net lending assets of $7.8 billion to Macquarie Group limited. This highlights the continual emphasis on core businesses.
 
The bank offers a distinctive geographical footprint and a business mix that provides diversification of earnings. The strategy is to operate as a super regional bank which serves 10 million customers in the retail, institutional and commercial segments in 33 markets with the help of 50,000 employees. Headquartered in Melbourne, it is one of the big four Australian banks and has a global ranking in the top 25 banks ranked by market capitalisation. It is one of the top four corporate banks in Asia and is also the largest bank in New Zealand. The bank has something of a protected position because of the strict regulatory environment and the economies of scale though the big four banks compete fiercely with each other.
 

Comparative Features (Source: Company Reports)

For the first half of FY 2015, revenues were up 5.3% to $ 10.18 billion and the cash profit was up 4.6% to $ 3.67 billion. The statutory profit was up 3.4% to $ 3.5 billion and the cash EPS was up 3.8% to 133.6 cents per share and the DPS was up 3.6% to 86 cents per share. Return on equity was down 80 basis points to 14.7% and CET1 was at 12.4% and up by 40 basis points to 8.7% on an APRA basis.
 
In our opinion, the bank is sound in terms of operations and we expect it to continue to be so with a healthy balance sheet. It is true that mortgages account for a big part of the loan book but a large proportion of these loans are covered by mortgage insurance for which the borrower pays. The current metrics suggest that the stock is relatively cheap and we would recommend a Buy at the current price of $27.93.


ANZ Daily Chart (Source: Thomson Reuters)

National Australia Bank Ltd.


 
In spite of its record-breaking ~$5 billion raising of capital earlier this year, the bank intends to pay a final dividend of 99 cents per share. Combined with its interim dividend of 99 cents, the shares trade on a dividend yield of around 6.3% fully franked. The bank has a flourishing local business though, over the past two decades, the share price has been depressed by some underperforming assets and questionable managerial decisions. However, the bank has been able to achieve solid growth over this period, but there are certainly many things that it can do to improve its future profitability. Led by CEO Andrew Thorburn, the bank has taken bold initiatives to divest its US bank, Great Western Bancorp; and plans to float its troubled UK bank, Clydesdale in the markets later this year. If this is successful, the bank will be able to get back to focus on its most profitable businesses in Australia and New Zealand.


Financial Metrics (Source: Company Reports)

Apart from the dividend yield which makes for a highly attractive income investment, there is plenty of potential for long-term upside in the stock price because of its strategy of getting rid of overseas assets and focusing on its profitable domestic business and this is particularly true of the decision to demerge Clydesdale Bank which has been a drain on resources. The strategy also means that the bank can focus on growing its profitable core businesses in its domestic markets where it has succeeded in improving the customer experience. We believe that the share is currently undervalued and accordingly rate this stock as a Buy at the current price of $31.30.
 

NAB Daily Chart (Source: Thomson Reuters)

Westpac Banking Corp



Like the other major Australian banking stocks, shares of this bank have lost considerable ground since the high point in April 2015 and even income investors who want to take advantage of the attractive dividend yields are likely to be disappointed with the price performance. This raises the question of whether the shares are worth buying at the current low prices. This is one of the most profitable of the big four banks because it had a net interest margin of 2.05% in the latest half year. However, it is pertinent to note that this margin has been sliding over the past few years as the group’s return on equity. Moreover, the higher capital requirements being imposed on all Australian banks by the regulators means that it is becoming increasingly difficult to maintain margins and the return on equity. However, a plus point in favour of the stock is the attractive fully franked dividend yield of almost 6% and it is unlikely that this will not be maintained.

 
Savings from Efficiency Programs and Expense to income ratio (Source: Company Reports)

On the face of it, the P/E ratio appears to be reasonable but when you consider the price/book value, the share appears to be pricey because of the premium to its competitors. The bank has recently updated about its step to book a $505 million software write-off that is related to 2%-3% growth in costs as indicated earlier. We cannot see much of an upside in the share price in the stock price in the short-term future and believe that you are better off staying away from the stock for the time being.


WBC Daily Chart (Source: Thomson Reuters) 

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The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
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The information given by Kalkine Pty Ltd ABN34 154 808 312 (Australian Financial Services License Number 425376) on this website is general information or advice only.

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