Leading banking analyst Brian Johnson says banks will return to payout ratios of around 60-70% in the first half of the year, and may even consider share buybacks or other capital initiatives in their second half results.
The combination of weak credit growth and continued profitability means that banks generate a lot of capital.
– Brian Johnson, Jefferies Banking Analyst
“What has happened is that JobKeeper has pumped a huge amount of money into the economy, and the unemployment numbers look better than people thought,” said Johnson, chief analyst. banking stocks within the Jefferies financial services group.
“And there has been massive growth in deposits, so the capital ratios look so much better, and the banks have stepped up their balance sheet provisioning.”
At the same time, he points out, loan growth has been extremely sluggish. “Owner-occupied housing is the only growing sector. Loans for investment housing have been bland, as have personal credit and small business loans.
“The combination of weak credit growth and continued profitability means that banks generate a lot of capital.”
But even aside from curiosity about the size of the bank’s interim dividend payments, there are other reasons why investors will take a closer look at Commonwealth Bank’s half-year results than usual.
First, investors will seek out the nation’s largest bank to confirm signs that the bad debts banks have incurred in the wake of the pandemic are much smaller than feared just a few months ago.
Figures released by APRA earlier this month another brutal slip the number of deferred mortgages and loans to small businesses in November.
Investors are hopeful that when it releases its results, the Commonwealth Bank will provide more up-to-date information confirming that this favorable trend continued into December and January.
This would confirm the indications that the big banks managed to pull off a very difficult maneuver; first by housing small businesses and individuals whose incomes declined when the pandemic caused economic activity to collapse, and then by encouraging large numbers of borrowers to resume their loan repayments.
Needless to say, investors, regulators and Canberra will listen carefully to any comments from Commonwealth Bank boss Matt Comyn on the economic outlook.
There is no doubt that confidence has increased as economic activity has rebounded and the rollout of a coronavirus vaccination program has moved forward.
Yet, as the head of the country’s largest bank, Comyn has unparalleled knowledge of segments of the economy – including parts of the tourism industry – that have been hit hard by the pandemic, and there will be therefore a keen interest in his point of view on what lies ahead.
Another area of interest will be the growing importance of online banking. The pandemic has accelerated the pivot to digital and mobile banking, with people reluctant to visit bank branches.
But it has intensified the pressure on banks to continue investing heavily in technology or risk losing customers to competitors with flashier apps.
Finally, of course, the Commonwealth Bank results will be a fascinating glimpse into the intense competition among banks for new home loans, especially as homeowner demand has reached historically high levels due to mortgage rates. ultra-low interest.
Commonwealth Bank, which is the nation’s largest mortgage lender and controls about a quarter of the market, has built a reputation as a formidable competitor in the home lending arena.
Home loan battleground
This was evident in its business update for the first quarter of 2021, released last November, in which the bank revealed that it had increased the size of its housing portfolio by $ 5.6 billion over the three months. ending in September 2020, growing twice as fast as the overall system.
Yet its main competitors are determined to increase their market share, both by offering insanely low mortgage rates and improving their efficiency in processing mortgage loans.
And that means investors will be watching closely if the Commonwealth Bank continues to gain market share from rivals in the lucrative, but highly competitive, home loan market.
The fierceness of competition in the home loan market is evident in APRA’s latest monthly statistics for November 2020.
These show that the Commonwealth Bank has dominated the home loan market, with $ 304.6 billion in owned loans and $ 158.6 billion in investment loans on its books.
Westpac was in second place, with $ 228.6 billion in owned loans and $ 176.1 billion in investment loans.
But there has been an upheaval among Melbourne-based banks, with ANZ Bank – the former latecomer – National Australia Bank overrun.
According to APRA figures, ANZ had $ 174.5 billion in owner-occupied loans and $ 86.8 billion in investment home loans (a combined total of $ 261.4 billion) on its books. in November 2020.
That put him ahead of NAB, which had $ 157.5 billion in owned loans and $ 102.6 billion in investment real estate loans (for a total of $ 260.1 billion).]
A potential disappointment for shareholders is that while all of the major banks have a strong capital position – all have Tier 1 capital ratios well above the “unmistakably strong” level of 10.5% set by APRA – Bank boards may decide it is “prudent” to postpone buybacks or other capital management initiatives until the economic outlook is more certain.
Johnson points out that there are a few factors that could cause banks to hit the pause button on return on capital plans.
First, he notes that extremely low bond yields hurt banks’ net interest margins.
Second, bank stock prices have already rebounded so strongly that capital management initiatives will not be as accretive in terms of earnings per share as they would have been in the past when stock prices were lower.
Finally, Johnson notes that APRA has yet to release its final Basel 3 benchmarking. [the international regulatory framework for banks] rules.
“These could turn out to be slightly negative for Westpac, as there will likely be a higher risk weight for riskier home loans, and slightly positive for NAB as there will likely be a lower risk weight for loans. guaranteed to small and medium-sized businesses, ”he said.
The author owns shares in major banks.