28min read
PREVIOUS ARTICLE Insurance sector heating up NEXT ARTICLE Peak Data - we're running out of wireless spectrum

The first cuts to the cash rate happened back in November 2011. The Banking Association howled in protest, citing the fact the big four banks, and others, rely on mortgage loans for the lion’s share of profits.  Indeed, in the early rate cutting cycle the Big Four refused to pass along the full cut to the consumer.

This, however, was the second lot of bad news for the Big Four in 2011.  

The first came on 18 May 2011 when ratings agency Moody’s downgraded the long-term debt ratings of Australia’s Big Four Banks, citing exposure risk to foreign credit markets to finance domestic lending.  Standard & Poor also downgrade on 02 December, 2011, citing revised standards for assessing short and long term credit worthiness.  

The last to the party was ratings agency Fitch, issuing a downgrade on 24 February 2012, but sparing Australia & New Zealand Banking Group (ANZ); Fitch echoed Moody’s concern about dependence on foreign borrowing to fund domestic lending.  Adding to the worries confronting the Big Four was the prospect of a crash in the property sector.  On 25 January 2012 the IMF warned that “Australian banks need to stash away billions of dollars in case the nation’s overblown property market collapses.”  By August 2012 the analyst downgrades began to roll in, with Citi, UBS, Macquarie, Deutsche Bank and others downgrading our largest bank – Commonwealth Bank of Australia (CBA).   

In the closing months of 2012 concerns over bad debts and lowering commodity prices were added to the mix.  By mid-2013 the financial websites offered multiple reports of major foreign hedge funds shorting the Big Four Aussie banks.  

So just how have the Big Four Banks done in the approximately two and a half years that have elapsed since that first credit downgrade?  The following table displays average annualised total shareholder return for the period as well as income, profit, earnings, and dividends for FY 2011, FY 2012, and FY 2013.  

Company

(CODE)

Total Income

(2011)

(2012)

(2013)

Net Profit

(2011)

(2012)

(2013)

Earnings per Share

(2011)

(2012)

(2013)

Dividends per Share

(2011)

(2012)

(2013)

Bad & Doubtful Debt

(2011)

(2012)

(2013)

3 Year Total Average Annual Rate of Shareholder Return

Commonwealth Bank of Australia

(CBA)

$20.2b

$20.9b

$22.19b

$6.4b

$7.1b

$7.7b

$4.397

$4.343

$4.731

$3.20

$3.34

$3.64

-$1.3b

-$1.09b

-$1.1b

19.6%

Westpac Banking Corporation

(WBC)

$15.9b

$16.8b

$17.8b

$6.9b

$5.9b

$6.8b

$2.015

$2.105

$2.244

$1.56

$1.66

$1.94

-$993m

-$1.2b

-$847m

19.5%

Australia & New Zealand Banking Group

(ANZ)

$15.7b

$16.5b

$17.3b

$5.3b

$5.6b

$6.3b

$2.098

$2.183

$2.163

$1.40

$1.45

$1.64

-$1.24b

-$1.19b

-$1.18b

18.1%

National Australia Bank

(NAB)

$15.1b

$23.6b

$29b

$4.9b

$3.8b

$5.4b

$2.428

$2.358

$2.478

$1.72

$1.80

$1.90

-$1.754b

-$2.73b

-$1.8b

17%

 

Despite the wall of worry, each of the Big Four managed to increase total income each year.  Commonwealth Bank and Australia & New Zealand Bank (ANZ) increased net profit every year and all four rewarded shareholders with increasing dividends.  The bad debts that some speculated could crush the banks never materialised.

The profits posted by the Big Four for FY 2013 reached record levels.  Here are some highlights:

•    Westpac Banking Corporation (WBC) posted an 11% net profit increase, coming in at $6.8 billion.  Dividends at WBC rose 5%.

•    National Australia Bank (NAB) recorded a record profit of $5.45 billion, a hefty 34% increase over FY2012, coupled with a more modest 5.5% increase in dividends.

•    Commonwealth Bank of Australia (CBA) came in with another record profit of $7.68 billion, an 8% increase.  Dividends went up by 9%.

•    Australia and New Zealand Bank (ANZ) posted a record net profit of $6.3 billion, an 11% increase; along with a 13% rise in dividends paid per share.

The surge continues.  On 24 February ANZ announced an unaudited net profit for the most recent quarter ending 31 December 2013 of $393 million, up from $296 million in the corresponding period in FY2012.  Commonwealth Bank reported a 16% increase in its FY2014 Half Year results and increased its interim dividend to $1.83, up from $1.64. National Australia Bank issued a trading update stating lower bad debt costs led to a 7% increase in cash profit for Q1 of 2014.  

The share prices of the Big Four have not been immune to the volatility of the last two years.  Here is a chart for CBA and NAB over that period:

Shareholders of ANZ and WBC experienced virtually identical paths.  Here is the chart:

So how does the analyst community at large view the Big Four Banks right now? Analyst ratings are as follows:

 Company (CODE)

 Buy  

 Overweight 

 Hold 

 Underweight 

 Sell 

 Consensus 

 Commonwealth  Bank of Australia  (CBA) 

4

1

5

2

6

Hold

Westpac Banking Corporation (WBC)

5

1

8

1

1

 Hold

Australia New Zealand Banking Group (ANZ)

5

4

6

1

1

Overweight

National Australia Bank (NAB)

7

1

7

0

2

Overweight

 

CBA has a total of 8 analysts at Underweight and Sell.  Even the two consensus Overweight banks are not immune to Sell opinions.

Now some analysts are wondering about future growth opportunities.  Past performance is unsustainable, some say.  The Big Four Banks are too expensive, others reckon.  The following table provides some current and forward looking measures on the banks:

Company

(CODE)

P/E

(TTM)

Forward P/E

(FY2015)

P/EG

(Current)

Dividend Yield

2 Year Earnings Growth Forecast

2 Year Dividend Growth Forecast

Commonwealth Bank of Australia

(CBA)

15.45

14.32

1.83

4.97%

8.2%

6.3%

Westpac Banking Corporation

(WBC)

16

13.96

3.25

5.05

4.6%

-0.9%

Australia & New Zealand Banking Group

(ANZ)

14.8

12.6

1.27

4.94%

11.2%

5.9%

National Australia Bank

(NAB)

15.68

12.6

1.96

5.37%

7%

6.7%

 

Some value investors will not consider a stock with a P/E over 15.  Note all the banks have Forward P/E’s that meet that measure.  A Price to Earnings Growth (P/EG) under 1 piques the interest of bargain hunters.  On that measure all the banks look overvalued, especially Westpac.  However, note that a P/EG under 2 does not scream dramatically OVERPRICED. While all the banks have positive 2 year earnings growth forecasts, only ANZ rises above the minimum 10% growth rate some analysts claim the banks need to sustain profit levels in the future.  If you consider the measures as a whole, including dividend growth forecasts, it would be hard for many to conclude the banks are outrageously expensive.  Of the four, ANZ might be the best bet for an investor who has yet to buy any shares of the Big Four.  What does ANZ have that gives it a possible edge?

The simple answer is entry into the Asian markets. In 2007 ANZ announced its ‘Super Regional Strategy’.   The plan is increase revenues from the bank’s Asia Pacific operations to 30% of total revenue by 2017.  On 28 February 2013, US based consulting group Greenwich Associates released research showing ANZ now among the top four corporate banks in Asia.  The consultants rated ANZ’s market penetration score at 41, a substantial increase from the year ago, at 28.  Greenwich stated ANZ, which just six years ago was not even in the top 20 in Asia, has risen to the top faster than any bank since the company started researching the Asian corporate banking sector.

ANZ has been cautious in acquiring assets of existing Asian banking operations, a strategy that has led to some criticism from analysts.  In 2009 ANZ bought the Asian assets of the Royal Bank of Scotland.  At an Asian banking conference in January 2014 ANZ CEO Mike Smith stated the bank was not averse to attractively priced acquisitions, but offered the opinion ANZ could reach its targeted 30% of total revenue from growth in its existing Asian assets.

NAB and CBA have branches throughout Asia, and Westpac now appears to be following ANZ’s lead.  To illustrate the edge ANZ has right now, consider that it boasts 9,100 employees throughout its Asian operations while Westpac is only now talking about increasing its 350 employees.  In addition, WPC’s business model in Asia is focused on wholesale banking, while ANZ is pursuing a full range strategy, offering retail, commercial, and institutional banking services.  Commonwealth Bank expanded its Chinese operations with the opening of a Beijing branch in November 2013.  As of that time the bank had branches throughout Asia with a total work force around 3,200 employees.

Opinion among industry experts appears to be that ANZ is the most aggressive among the Big Four in pursuing growth in Asian markets.  However, CBA reportedly has more operating locations spread across the Asia Pacific region and is focusing primarily on Indonesia and China.  

ANZ shares are up about 19%, year over year, while CBA’s shares have risen 15%.  NAB shares are up 12% and WBC shares are up 14%.  Since these stocks make an outsized impact on the ASX 200 Index, using the XJO rise of 10% as a comparison is questionable.  Regardless of numerous concerns, Australia’s Big Four banks are still considered among the best in the world.  The US S&P 500 is recognised by many professionals as the most important index on the planet and it is up 21% year over year.  Admittedly there are many who view that performance as overheated and using it as a comparison point may appear foolish.  But when you pluck the Big Four out of the relatively small index like the ASX XJO and throw them into a larger pool, the yearly gains do not seem so outsized.

The Big Four have surprised before and those with growth opportunities outside Australia may surprise again.  Investors appear to have been listening to the naysayers about future prospects, as it has been a rough three months for the Big Four.  Here is a three month table, comparing the share price performance of CBA against WBC followed by a comparison of ANZ and NAB:

Click on the links below to read other articles from this week’s newsletter

1. 6 Stocks for the New Mining Boom: NAB and CBA have branches throughout Asia, and…

2. 18 Share Tips – 7 April 2014: 18 Share Tips to BUY, SELL & HOLD from…

3. Aussie traders get set for goliath IPO, Alibaba: It’s being billed as Amazon and Yahoo combined…

4. Stock To Watch – McMillan Shakespeare: Market too pessimistic on fringe benefits tax…

5. Promise on the horizon for Australian economy: The Australian economy appears to be benefiting…

6. The Absurdity of US Natural Gas Exports: How much natural gas is the United States…

7. New ASX guidelines to force sustainability reporting: Publicly listed companies will need to disclose…

8. Top 10 shorted stocks: Each day we feature the top 10 shorted stocks…

9. Stocks on a roll: ASX rolling 52-week highs for the previous…

10. Stocks on the slide: ASX rolling 52-week lows for the previous…

 

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.