060319 audL

Aussie Banks Face Up to Challenges

Equities 5 minutes to read
Strats-Eleanor-88x88
Eleanor Creagh

Australian Market Strategist

Summary:  Today we take at look at two of Australias largest lenders who have delivered trading updates to the market.


Both NAB and CBA have delivered resilient trading updates in a challenging environment where a multitude of headwinds continue to buffet profitability across all line items, including falling interest rates, tepid credit growth and increased compliance costs/technology spends. In this environment, investors are focusing on the worst being over, taking all the good news they can get and running with it. Resilient updates are well received.

The proof was in the pudding yesterday for CBA with a solid consensus-beating result driven by peer leading operational execution and NIM expansion (+1bp hoh). Substantiating the recent share price outperformance relative to the other major banks. Outperformance that now leaves the bank trading at a 26% premium relative to its 2 year historical forward PE multiple and 30% premium relative to 5 year historical average premium over other Australian banks. Too pricey for our liking.

cba valuation
Source: Bloomberg

In hot pursuit, NAB have delivered a similarly pleasing 1Q20 trading update. With cash earnings up 1% on prior period average and better-than-expected revenues up 1% on the 2H19 quarterly average due to a “slightly higher” NIM. NIM also benefiting from mortgage repricing, although the bank did not add details. With RBA rate cuts having the capacity to squeeze NIMs, higher margins from both NAB and CBA represent a stable outcome against a challenging backdrop.

In terms of forward PE relative to ASX200 stocks NAB ranks in the 15th percentile, cheaper than 85% of index components and relative to the index forward PE as whole trades at a 33% discount. The result is therefore sufficient against that backdrop even with the prospect of the MLC wealth management divestment being delayed.

The prospect of near term dividend cuts is reduced as tail risks have been wound back and the pace of asset quality deterioration slowed across both NAB and CBA, these relatively robust updates will lend investors further confidence on that front. The dividend yield support is key for the sector given earnings pressures still exist a plenty. The sector dividend yield, relative to both government bond yields and term deposit rates, is flirting with decade highs. Meaning a laundry list of concerns is countered by low yields elsewhere and an ongoing recalibration of long term interest rate expectations justifying higher share price valuations and continuing to drive investors up the risk spectrum into equities.

While the worst may be over for now, the outlook for the banks remains under pressure. Credit growth is subdued, margin pressures due to rate cuts, regulatory pressures and ongoing competition from Macquarie and other non-banks remain. Not too mention other factors like digital displacement and large technology spends needed just to keep apace with ongoing industry digitalisation.

CBA’s current valuation relative to itself and peers is hard to justify, despite the solid update. The outlook does not justify a continued share price re-rating. For NAB, valuation is less of an issue and the bank trades at a smaller 6% premium relative to its 2 year historical forward PE multiple and 7% discount relative to 5 year historical average premium over other Australian banks.

That being said, a rising tide floats all boats and ample liquidity and the ongoing return of central bank largesse continues to drive markets higher. Investors have learnt over time that central banks will step in to support financial assets given the feedback loop to the real economy, and monetary policymakers have already exhibited their willingness to intervene with added stimulus under the guise of “extending the cycle”. The expectation of low single digit earnings growth is enough to underpin, along with notion FED and other central banks are ready to step in on any growth wobbles. These factors combined fuel equities higher, which in turn generates a positive feedback loop and strong topside momentum.

As long as investors feel like central banks have their back and policy rates remain low the longer term tailwinds for equities remain.

Banks profit

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.