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On 01 November 2011 the RBA (Reserve Bank of Australia) made what was to be the first of many cuts in the cash rate.  The Banking Association howled in protest, citing the obvious 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 was the second major piece of bad news for the Big Four in 2011.  

The first came on 18 May 2011 when ratings agency Moody’s Investors Service 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 chimed in with its own 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), echoing 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 (International Monetary Fund) warned that “Australian banks need to stash away billions of dollars in case the nation’s overblown property market collapses.”  By August of 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 annualized 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 materialized.

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 the biggest (CBA) and the smallest (NAB) over that period:

 

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

 

It would be hard to escape the conclusion that the banks successfully climbed the wall of worries they faced.  But that is all in the past and now it’s on to the future.  How does the analyst community at large view the Big Four Banks right now?  The Asian edition of the Wall Street Journal (WSJ) online provides the following summary of analyst ratings for the current month:

 

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

 

With all due respect to the WSJ, some retail investors would be hard pressed to understand a consensus Hold recommendation on CBA when there are 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 say.  The following table provides some current and forward looking measures on the banks:

 

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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