They’re all said to be Sells. But the Big Four just reported a combined $15bn post-tax profit

Brokers have been brutal on Australia’s Big Four banks, but KPMG begs to differ, pointing to the quartet’s combined H1 after-tax profit of $15 billion.

Christian Edwards

The Big Four still cast a huge shadow over the Australian banking sector. Picture: Getty Images

9 min read

11:53AMMay 08, 2024

Stockhead

By Middlemarch – if that’s a time and not a place – the brokers at Macquarie Bank were starting to turn on their four larger brethren.

The higher-for-shorter surge in the Big Four share prices, which almost single-handedly led the ASX 200 to clock its most recent record all-time high, triggered something dark and fearful which appears to have been brewing in local brokers for some time.

Certainly the bump in valuations was enough for Macquarie to pull all the plugs.

The broker doubled down on its bearish bearing, slapping the Big Four lenders with some direct advice, telling clients to “underweight everything”.

For the latest finance news, sign up here for free Stockhead daily newsletters

At the time, Macquarie hit the panic button, unable to reconcile the rising share prices with the banking majors’ fundamentals, which just didn’t sit right for the thinkers at the fifth major.

Westpac copped it worst, hit with the rarest of rare double downgrades – going from Outperfrom to Underperform with the click of a keyboard.

Yet, according to the latest fussing and fiddling by the professional services firm KPMG – itself one of the Big Four accounting majors – the Big Four Aussie major banks just reported a combined 1H profit after tax of $15 billion.

Steve Jackson, head of banking and capital markets at KPMG Australia, said that post-tax half-year numbers are down about 10.5 per cent compared to the first half of last year, and an average of 0.3 per cent (from $15.1 billion) for the second half of FY23.

It’s a tricky read, to be honest, when compared to the souring of sentiment the majors have been attracting from the country’s brokers.

Two weeks ago, Citi straight up recommended investors pull the plug and sell out of all Big Four lenders.

Citi downgraded Westpac and ANZ, bringing those into line with the “Sell” ratings the broker had already slapped on Commonwealth Bank and National Australia Bank shares.

Citi called CBA just “too expensive”, and said competition and slowing credit growth were putting the squeeze on NAB’s dominant business banking arm.

Yet this is how the banks have gone so far in 2024, despite the almost universal agreement on their gloomy outlook.

Not too shabby for high dividend paying stalwarts.Source: Morningstar

Battered but still biggest

KPMG banking partner Maria Trinci reckons the latest results demonstrate the continued strength of the majors.

“(They are) maintaining asset base growth, healthy capital and liquidity positions … with credit quality continuing to show no significant signs of stress,” she said.

As we’ve been hearing for ages, the biggies belted out an extraordinary 1H23 – rich with records and buybacks.

That’s around the time analysts started to put the mockers on.

Sensing the cycle was swinging deeper and fuller, pretty much everyone started to back off the Big Four and the advice seemed spot on, as 2H23 dropped with a splat and little to love on the outlook.

KPMG says that with a record first-half profit performance and a softer second half, FY23 was very much a year of two halves.

One of my favourite financial lingo fallbacks.

“The majors’ performance has stabilised in 1H24 in line with the 2H23 position,” Trinci said.

“Profits have come off from the highs of 1H23, but income is broadly flat, the pace of margin erosion has slowed and operating expenses have reduced modestly compared to 2H23.”

Margin erosion aside, even to the ASX galaxy of small caps, the Big Four dominate

Australia’s financial universe, ensuring we’re all somewhere in orbit around the gravitational pull of at one, if not all of them.

In a country not known for big numbers, their combined total assets stand somewhere near $3.85 trillion.

On a good, happy, happy-with-China-shaped year, that’s still twice the size of our annual economic output.

Most of us directly own shares in these banks, while the rest of us do, but don’t really know it, via our superannuation funds, which would be hard pressed to explain why they’re not all up in the face of these pre-eminent Aussie institutions.

And the country’s no mug on this front either – Australia holds the fourth‑largest pool of investment fund assets in the world and certainly the largest in Asia.

Last month Nathan Zaia, Morningstar’s senior equity analyst, tried to put his finger on the big bank malaise striking fear into fundies.

After reasonably uneventful earnings updates, it is hard to pinpoint a single specific driver for the turnaround in bank sentiment, Zaia said.

“Still, we think part of it is that a likely lower cash rate eases housing fears and provides banks an opportunity to reprice loans and deposits to protect margins,” he said.

“Major bank share prices increased 23 per cent since November 2023, outperforming the 16 per cent increase in the Morningstar Australia Index over the same period.

According to Morningstar, the major banks’ weighted average price/fair value estimate is 1.14, up from 1.05 in the last quarter. Non-major banks trade at a price/fair value of 0.85.

“Australian banks face low credit growth, softer net interest margins, and an increase in loan losses in the short term,” Zaia said.

He said banking sector returns on equity would be suppressed in fiscal 2024.

“Hence, we expect the banks to change loan and deposit pricing in the medium term to lift margins to a level that allows the wide-moat-rated major banks to generate returns above their cost of equity,” he said.

“Net interest margins are softening due to competition in loan and customer deposit rates.

“Repayment of cheap Reserve Bank of Australia funding and above-average refinancing activity are elevating competition.

“When banks had a large loan book on higher rates, cheaper loans to new customers could be made while the bank still achieved strong returns overall.

“However, excess returns are now modest, making it unlikely this trend will continue.

“We expect banks will pull back from aggressive competition on new loans and deposit rates.”

Some bullet points on the Big 4’s 1H24

Every six months KPMG, which has a cracking financial services analyst team, runs the ruler over the four big banks as a unit, dropping its “Major Australian Banks: half year 2024 results” analysis. And I find the outcome always interesting.

Total operating income in 1H24 is broadly flat on the 2H23 result, decreasing by 0.02 per cent to $44.5 billion. This follows a record 1H23 income performance of $45.7 billion.

Despite an increase in interest-earning assets of 1.9 per cent, total net interest income decreased by 0.5 per cent compared with 2H23 to $36.8 billion.

This was due to further margin erosion, although at a slower pace than 2H23, driven by continued strong competition within the mortgage market and increased costs of deposit funding.

Average net interest margin (NIM) was 179 basis points during 1H24, a decrease of 11 basis points from 1H23 and 5 basis points from 2H23.
The average liquidity coverage ratio (LCR) increased to 135.3 per cent, up 100 basis points from 2H23.
The average CET1 ratio (which compares a bank’s capital against its assets) across the four banks has increased by 10 basis points to 12.6 per cent from 2H23.
The majors declared higher interim dividend payments in 1H24 with an increase in the average interim dividend per share of 2.9 per cent compared to 1H23.
The majors booked $1.21 billion in impairment charges in 1H24, approximately 13 per cent lower than over the past 12 months. Over the first half, the average provisions as a percentage of gross loans and advances remained steady at 0.68 per cent.
Total impaired loans have increased by 2.2 per cent across the majors in the last 12 months, although this is in the context of continued overall portfolio growth.
Capital and liquidity ratios across the majors remain well above regulatory minimums, demonstrating balance sheet and liquidity strength.
The average LCR increased to 135.3 per cent, up 1 percentage point from 2H23 and the average CET1 ratio is 12.6 per cent, an increase of 10 basis points compared with 2H23.

Frank Mirenzi, VP and senior credit officer at Moody’s Ratings, said the latest reporting cab off the rank, Australia and New Zealand Banking Group (ASX:ANZ), had delivered first-half fiscal 2024 results that were, ahem, credit neutral. Not the highest of praise.

“Australia and New Zealand Banking Group’s first-half fiscal year 2024 results are credit neutral,” he said.

“The bank’s cash earnings of $A3.6 billion fell by only 1 per cent compared with that in the prior period, largely due to a 27 per cent increase in Markets income, with net interest income declining by 1 per cent.

Visit Stockhead, where ASX small caps are big deals

ANZ’s net interest margin fell 2bps, excluding Markets, driven by the impact of home lending competition and higher wholesale funding and deposit costs.

Jeff Cai at Jarden was a little more blunt regarding ANZ, aside from acknowledging a generous buyback

“Overall, a slightly disappointing result,” he said.

“While cash profit of $3.55 billion was in line with expectations (Jarden: $3.54 billion, VA consensus: $3.53 billion), that was helped by materially lower BDDs (bad and doubtful debts).

“1H24 headline NIM (net interest margin) was a big miss to expectations but impacted by the recognition of Markets income.

“Excluding this impact, it fell 2bps to 1.63 per cent, a touch better than expected (Jarden: 1.61 per cent and consensus: 1.62 per cent). While revenue was in line, costs were about 2 per cent ahead of expectations.

“The key positive for us out of the result was capital with CET1 of about 13.5 per cent above expectations, which saw ANZ announce a $2 billion buyback, potentially larger ⁄earlier than some investors had expected.”

“We expect these earnings challenges to persist into the second half.

“Balance sheet settings remain strong with low levels of problem loans, high loss provisions and very strong capitalisation.

“The group announced a $A2 billion share buyback and on a proforma basis.

“Coupled with the impact of the Suncorp-Metway acquisition, the bank’s common equity tier 1 ratio would remain high at 11.85 per cent.”

Cai was more upbeat over Westpac which also dropped quarterlies this week, maintaining Jarden’s Overweight rating and calling the first half for WBC a “solid operational result” but warning “questions remain on the medium-term outlook”.

The highlight here – the hero of the Big 4 1H dish – is almost certainly WBC’s successful investment in improving service levels, which Cai said was bearing fruit, with a significant improvement in mortgage turnaround times.

“This appears to have allowed it to increase its pricing relative to peers while maintaining solid mortgage growth in line with systems,” he said.

WBC' has made solid progress.

Cai said WBC’s 1H24 results were solid and better than expected across most measures.

The stabilisation in core NIM at 1.80 per cent had been a highlight, with guidance suggesting it should remain “flattish” ahead.

“That said, the better-than-expected results were arguably overshadowed by unanswered questions on the outlook, namely the outlook for costs in FY25E, as WBC’s tech simplification project (UNITE) gets under way,” he said.

“Along with the topic of CEO succession, this creates material uncertainty for the medium-term outlook.

“That (also) said, these were still solid results and the improvements in the underlying business suggest a turnaround is underway.

“We upgrade our FY24 and FY25 EPS forecasts by about 1 per cent and about 2 per cent, respectively. We maintain our Overweight rating, with WBC remaining our second pick in the sector and preferred ‘value’ bank.”

Margin call

The majors all cited strong competition as a key driver of margin pressure, including other ADIs (authorised deposit-taking institutions) acquiring market share and non-traditional lenders entering the market.

KPMG Australia banking partner Kim Lawry said the combined household lending market share of the majors had decreased by 0.4 per cent over the last 12 months, consistent with the decrease of 4.1 per cent since mid-2019.

“Despite continued strong competition in the mortgage market and higher fundings costs, the compression of net interest margins for the majors has moderated in the first half of the financial year,” Lawry said.

She said operating expenses, which had been rising in FY23, had turned a corner and reduced modestly in 1H24 by 1.0 per cent compared to 2H23.

“The average cost to income ratio in 1H24 is 48.7 per cent which is a reduction of 40 basis points on 2H23, although still 348 basis points above 1H23 levels.

“Personnel remains the largest contributor to operating expenses, and over the past 12 months the majors have reduced total headcount by approximately 0.5 per cent with personnel expenses down 0.3 per cent compared with 2H23.”

This content first appeared on stockhead.com.au

Get the latest Stockhead news delivered free to your inbox. Click here

Read related topics:Macquarie Group

NewsBite