Australia's "Big Four" banks – ANZ, NAB, CBA, and Westpac account for around 20% of the Australian stock market's value and all four, along with Macquarie Group, sit within AFIC’s top 25 holdings.
ANZ, NAB, and Westpac, recently reported their half year financial results for the period ending 31 March 2024. These results provided us with insights into important factors that are key drivers of their performance and helped us form a view on likely future performance, returns, and value. Note that the Commonwealth Bank has a different reporting period, and it will report its next set of profit results in August 2024.
Overall, the latest financial results from the big banks were considered solid and generally met market expectations. While profit growth for ANZ, NAB, and Westpac was moderately down from the previous six-month period, dividends remained consistent, underscoring the enduring appeal of the sector as a long-term investment option for income within the portfolio.
In this article, we share our insights into the key performance factors of each of the three major banks who reported for the period as well as Macquarie Group. We also explore market reactions and offer our investment view on Australia's banking sector.
AFIC has historically taken positions in the ‘Big Four’ banks and held them consistently. In 2023 we had the opportunity to increase our position across selected banks when there was a big selloff in March and April on the back of the US regional banking crisis. We saw an opportunity to buy good quality banks that were offering attractive value with good dividend yields.
We believe the banks remain financially strong, with healthy balance sheets, including having excess capital, good leadership, and improved return on equity (ROE). We also believe they are benefiting from a low period of stress on the borrowers' part. Increasing cost of living pressures and interest rates on borrowers have not yet resulted in significant bad or doubtful debt for the banks, which would typically happen through periods of stress in the economy. Bad and doubtful debts remain at very low levels for the major banks. If we look historically over the last 20 years for example, ANZ have had bad and doubtful debts equating to around 0.25% of their loan book, in the latest results it was 0.02%. However, we don’t expect these conditions to last forever. Whilst the major banks remain a meaningful part of the AFIC portfolio, they appear to be very fully priced at present. As a result, we have slightly reduced our holdings in the sector more recently.
ANZ’s profit growth saw a marginal dip of 1%, but the bank's performance remains steady with dividends meeting or slightly exceeding expectations. The bank's focus on prudent risk management and cost control has contributed to maintaining a healthy balance sheet, reflected in its Return on Equity (ROE) of 10.1%.
ANZ's commitment to returning capital to shareholders through dividend payments and share buybacks was well-received by investors. Despite competitive pressures in the mortgage and debt markets, ANZ's robust performance and a Dividend Yield of 7.3% when the benefit of franking is included, highlights its ability to navigate volatility while maintaining profitability.
Westpac also reported a slight 1% decrease in profit growth, however, dividends remained stable. The bank's focus on operational efficiency and capital allocation strategies, such as share buybacks and special dividends, were well received by the market. Westpac's ROE stands at 9.8%, with a Price Book Ratio of 1.3 and a Dividend Yield of 8.5%.
While NAB experienced a modest profit performance, with a decline of 3%, its dividends were in line with expectations. NAB's focus on customer-centric initiatives and digital transformation efforts have positioned it well to adapt to changing consumer preferences and market dynamics.
The bank's proactive risk management practices and emphasis on maintaining robust credit quality have also contributed to its overall stability and long-term growth prospects. NAB's ROE is 11%, with a Price to Book Ratio of 1.8 and a Dividend Yield of 6.9%.
Macquarie’s profit was down 32% in the last six months. We maintain a favourable long-term view of the company. Its results in the previous period were somewhat ‘super-sized’ given the very strong performance of its Commodities and Global Markets in the previous year. These have now returned to what would be considered a more sustainable level. Return on equity was 11% for the last six months compared to 17% for the period before. The market had not expected results to display the same level of growth as the previous six months and Macquarie did a good job of positioning these expectations. We believe Macquarie is one of Australia’s leading global companies with strong leadership, and therefore warrants a strong holding in the portfolio.
Conclusion:
While competitive pressures in mortgage and debt markets are likely to persist, banks have demonstrated an adeptness in navigating competitive landscapes and adapting to evolving consumer preferences. Nonetheless, forward-looking indicators warrant heightened attention amidst prevailing economic uncertainties, both domestic and international. With strong fundamentals, resilient performance, and prudent management, Australian banks continue to be a cornerstone of the economy and a reliable long-term choice for investors looking for income.