Analysts expect earnings rebound from reporting season

The February reporting season has more upside potential than normal, according to UBS.

Commonwealth Bank’s results next Wednesday will be closely watched for its capital management plans. Picture: NCA NewsWire / James Gourley

The February reporting season has more upside potential than normal, according to UBS.

After falling 24.4 per cent in the 2019-20 financial year, aggregate earnings per share for S&P/ASX 200 companies is expected to rebound by an equally massive 23.3 per cent in the current financial year due to a rapidly recovering domestic economy and near record high commodity prices.

The consensus “bottom-up” forecast of analysts is for the heavyweight resources sector to lead earnings per share growth with a spectacular rise of 42.4 per cent, largely due to booming iron ore prices and, in some cases, record shipments by Australian producers in the first half.

Another heavyweight sector — financials — should see earnings per share growth of 23.3 per cent, according to UBS, while industrials ex-financials lag, with EPS up just 3.1 per cent.

The pre-reporting-season “confession season was skewed more towards upgrades rather than downgrades, as companies, particularly building materials producers, coped better than expected with COVID-19,” notes UBS quantitative analyst, Pieter Stoltz.

Among industrials ex-financials, the largest consensus upgrades for the 2021 financial year in the past three months have been in media, discretionary retail and information technology, and the consensus now expects technology, healthcare and media to offer the strongest EPS growth in the year.

The key themes in his view will be a recovery in dividends and possibly a rise in payout ratios, guidance/outlook statements (which could stay murky due to COVID-19), the coronavirus ­impact on European-exposed stocks, beneficiaries of stimulus and strong housing activity, and the impact of COVID-related costs on earnings. The impact of the surging dollar may also make the list.

The outlook for the year ahead for heavyweight sectors will matter most for the overall market.

ANZ has a non-consensus view of iron ore prices retreating to $US100 a tonne over 12 months after hitting a nine-year high near $US180 in December, but if commodity prices do stay buoyant, resources sector EPS will continue to be revised up, notes Stoltz.

UBS is also well ahead of consensus for financial sector EPS, largely due to its expectations that the banks could reverse provisions and institute share buybacks.

Morgan Stanley’s Richard Wiles has said the banks would be better off increasing their dividends and payout ratios than launching share buybacks.

But either path should have similarly bullish implications for bank shares.

CBA’s results next Wednesday will be closely watched for its capital management plans.

“We believe CBA should consider using its surplus capital to support a higher medium-term payout ratio rather than undertaking buybacks,” Wiles says.

While CBA’s strong capital and provisioning, the economy’s “resilient reopening” and the lifting of the Australian Prudential Regulation Authority’s dividend restrictions give it some optionality on capital management, and all the major banks now have healthy capital ratios, Morgan Stanley’s preconditions for buybacks are unlikely to be met this year, according to Wiles.

Moreover, banks could create more value for shareholders by targeting a higher “sustainable” medium-term payout ratio rather than undertaking buybacks.

CBA’s target dividend payout ratio range is still 70c-80c per share, but its 2021 financial year “excess” capital of about $6bn could be used to add more than $1bn to the annual dividend for several years.

“All else equal, this implies a 10 percentage-point increase in the payout ratio and an annual dividend about 50c or 10-15 per cent above our base case in FY22 and FY23,” Wiles says.

For this financial year, he sees CBA paying a full-year dividend of $3.30 a share, based on a payout ratio of 72 per cent and a resumption of CBA’s historic first-half/second-half skew of about 45/55 per cent in the full-year dividend, with an interim dividend of 155c, or 47 per cent of his FY21 estimate.

But in the near term, he expects CBA to adopt a conservative approach to capital, meaning that it will not announce a buyback at the first-half result and notes that the bank could reveal a more pronounced 1H/2H skew of about 40/60 per cent for its dividend.

However, the results themselves will also matter and, in that regard, Citi’s Brendan Sproules warns of potential “sticker shock” from the impact of strong mortgage growth on net interest ­margins.

“Discussions with investors in recent months have revealed much concern around the impact of strong mortgage market ­activity and its impact on net interest margins,” he says.

“To that point, it is worth noting that the two February-reporting banks — CBA and Bendigo and Adelaide Bank — are two retail-biased banks that have also had the strongest mortgage flows and share price performance relative to peers.”

Moreover, investors looking for a “read-through” for other banks should beware that “these results are more biased than usual”.

“The gap between the ‘reports and the report-nots’ [banks] will be stark this reporting season given the two reporting banks are more retail-focused with strong mortgage momentum, versus the April/May reporting banks with no momentum,” Sproules says.

“While much has been made of CBA’s strong growth, the reality is that new fundings have barely moved in the past four years, as the key drag on credit growth has come from accelerated repayments.”