Mixed bag of results has market starting to struggle as banks feel the heat

Monday’s results were a mixed bag, but the broader market began to struggle as the banks came under pressure.

After the S&P/ASX 200 surged 5 per cent to a record high daily close of 7628.9 in recent weeks, it fell 0.6 per cent to 7582.5 on Monday, its biggest fall in 13 days. Picture: NCA NewsWire/Christian Gilles

Monday’s results were a mixed bag, but the broader market began to struggle as the banks came under pressure, led by a 9.9 per cent dive in Bendigo & Adelaide after its results and a 2.7 per cent fall in ANZ — after Citi downgraded it to “sell” following a two-year high of $29.53 on Friday.

After the S&P/ASX 200 surged 5 per cent to a record high daily close of 7628.9 in recent weeks, it fell 0.6 per cent to 7582.5 on Monday, its biggest fall in 13 days, with some added downward pressure coming from weaker crude oil and copper prices after China’s monthly economic activity data disappointed.

With CBA trading ex-dividend on Tuesday, investors will either keep rotating into other banks and stocks like CSL – which reports on Wednesday – or temporarily succumb to worsening Covid-19 lockdowns domestically and early signs of slowdowns in the US and China, even if that soon fuels stimulus bets, adding to FOMO (fear of missing out) amid TINA (there is no alternative).

Ahead of ANZ’s third-quarter trading update on Wednesday, Citi analyst Brendan Sproules said a sharp plunge in volatility and trading conditions in markets is set to expose significant weaknesses in ANZ’s second-half core profit.

ANZ’s underlying revenue ex-markets fell sharply in the last two half-year periods, and while that was mitigated by elevated markets revenues, recent peer results suggest markets revenue has fallen sharply. Mr Sproules expects ANZ’s core profit in the second half of 2021 will miss the consensus estimate by 9 per cent.

“This revenue weakness has come at an unfortunate time for core profit, as management had also guided second-half underlying costs to be 1-2 per cent higher,” Mr Sproules said.

“The impact on cash earnings is expected to be somewhat mitigated by further bad and doubtful debt reversals, however, we expect the market to look through this.”

Bendigo’s JAWs trends were “likely the envy of peers” with just 1 per cent underlying cost growth and 4.5 per cent revenue growth driven by 3.8 times system loan growth and net interest margins underpinned by repricing and deposit tailwinds as front book competition accelerated.

But investors will focus on the extent that revenue growth will moderate as repricing and deposits subside, and while costs have been well managed through Bendigo’s transformation program, investors need clarity on the returns from deploying $116m of fresh equity to acquire Ferocia.

“Overall, we think this result highlights the narrowness of sector revenue and volume momentum which appears to lie solely in mortgages,” Mr Sproules said.

“Heading into the 2022 financial year, we expect a more challenging outlook for momentum.”

JPMorgan’s Andrew Triggs said Bendigo’s second-half result was 6 per cent below his estimate, with net interest margin pressures from front and back book mortgage pricing increasing further.

Cost guidance of 3 per cent for the 2022 financial year was three times his estimate, albeit half of it acquisition related, and the rest from increased technology costs and software amortisation.

He expected downgrades to consensus pre-provision profit estimates given the weaker underlying result, lower net interest margins, and guidance on costs.

BlueScope Steel shares initially rose 2.6 per cent to a 14-year high of $25.65 on stronger-than-expected earnings guidance and a $500m share buyback, but ended up just 0.6 per cent.

Still, JPMorgan’s Lyndon Fagan said profit guidance for the first half of 2022, of $1.8-2bn, implies that the consensus estimate of $2.8bn will need to rise, so it will be one to watch for upgrades.

GPT withdrew its earnings guidance due to Covid-19 uncertainty, but its first-half earnings beat market expectations according to UBS, with first-half cashflows boosted from rents billed and not received in the 2020 financial year, and retail leasing tracking ahead on better than expected occupancy.

JPMorgan’s Richard Jones said the retail outlook is “challenged given the recently announced NSW mandated rent relief for tenants with annual turnover of up to $50m, with a minimum of 50 per cent to be provided in the form of a waiver”.

He saw downward revisions to full-year estimates given the challenging short-term retail outlook.

GPT shares rose 3 per cent to $4.80.

Lendlease was a bigger disappointment, with its shares down 8 per cent after reporting annual net profit towards the bottom end of the group’s range provided only six weeks ago.

Guidance for return on invested capital development in the 2022 financial year was 2-5 per cent, versus the company’s target of 10-13 per cent. And while the construction earnings margin of 2-3 per cent was in line with its target, investment ROIC guidance was below.

“The cost out program is larger than anticipated, however we had anticipated any significant cost-out program to be attached to an increase in return on equity targets,” said Macquarie’s Stuart McLean. “Therefore, with ROE targets unchanged at 8-11 per cent, this may imply a reduction in earnings on an ‘underlying’ basis.”

Carsales.com was particularly strong, surging 3.9 per cent to a record high of $23.46 after its annual results came at the top end of the guidance range — with beats in Dealer & Private, better than expected cash generation and a forecast of solid growth in adjusted 2022 financial year earnings, depending on the duration and frequency of lockdowns in the first half.

Originally published as Mixed bag of results has market starting to struggle as banks feel the heat