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Australian Banks: Simpler business models produce sound results
Australian Banks: Simpler business models produce sound results

Australian Banks: Simpler business models produce sound results

The four major banks are significant in the Australian share market and sit within the top 20 holdings of AFIC's portfolio. Portfolio Manager Brett McNeill reviews the recent bank reporting season and highlights key valuation metrics.

ANZ, NAB and Westpac reported their results for the year to 30 September 2023, and Commonwealth Bank reported its results for the year to 30 June 2023. Across the cohort, the results are much cleaner than the previous four years and reflect the simpler business models and strategies pursued after the Royal Commission.

There was a clear slowdown from the first to the second half of this results period, primarily due to margin pressure. However, balance sheets are very solid despite this, with all four banks holding capital well above APRA's 'unquestionably strong' level of 10/25%.

The big four are positioned for sound growth

All four banks delivered strong headline profit growth although loan growth is anticipated to continue at more modest levels than the past two years.

Mortgage and deposit pricing competition continues to remain high amongst the banks which is expected to lead to further reductions in Net Interest Margins - the amount the banks are earning from loan interest compared to what they're paying in interest on deposits. In addition, it's expected that cost growth will continue.

Pleasingly, credit quality remains strong, with high provisioning levels in place. However the effect of higher interest rates on consumers will take time to flow through, with only a small impact to date.

Funding and liquidity also remain sound, with Liquidity Coverage Ratios around 120-130% of required levels.

Key results

Net Interest Income (NII), the key contributor to bank profits, continues to be important. All four banks produced double-digit NII, with Commonwealth Bank leading at 18.5%.

Two key drivers of NII growth, Loan Growth (volume) and Net Interest Margin (NIM) (price), all improved with Commonwealth, ANZ, and Westpac delivering loan growth of around 5%.


Strong growth in Operating Profit (pre bad debts, tax, and other items) was achieved by all four banks, with Westpac ahead of its peers at 33%. While Westpac was the only major bank to report a reduction in costs, this reflects reversal of 'one-off' costs that have plagued the bank in recent years, and underlying costs still grew.

NAB and Commonwealth Bank continue to lead the market in cost efficiency, with Commonwealth, Westpac, and NAB reporting bad debt charges of between 9 and 12 basis points (bps) of total loans.

Impairment Expense as % Average GLA's20222023

All four banks appear well positioned when measured by Collective Provisions as a percentage of Credit Risk Weighted Assets, with NAB the best provisioned at 1.47%. All banks are now at or above double-digit Return On Equity (ROE), with Commonwealth Bank leading.

Cash ROE20222023

Capital positions remain strong, with Common Equity Tier One (CET1) ratios well above minimum regulatory standards, and all holdings are at least 12%. However, ANZ has the highest CET1 ratio of 13.3% due to capital being held for its proposed acquisition of Suncorp Bank.

Quality and valuation

We continue to rate Commonwealth Bank as the highest quality bank, based predominantly on the strength of its retail franchise, which has delivered superior historical returns against peers. The bank's Price to Book ratio of 2.3% also sets it apart and is double that of ANZ and Westpac, with NAB its closest competitor at 1.4%

Dividend yields are another valuation measure based on the consensus forecast for the current Financial Year (FY24). ANZ and NAB look the cheapest, with Commonwealth Bank the most expensive. This forecast is consistent with the Price to Book ratio valuations.

Dividend yields


These dividend yields are before franking credits, which means ANZ, NAB and Westpac require minimal dividend growth to deliver an after-tax return of 8%-10%, making these banks' valuations relatively attractive.

Banks in AFIC's portfolio

The major banks play an important role in AFIC's portfolio, providing a good source of fully franked income. With solid balance sheets and a track record of delivering good income returns over the medium-to-long term, they represent a large part of our portfolio reflective of their overall size in the Australian equity market.

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