Banking Industry

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  1. 1. Banking Industry Prepared by: Junaid Farooq 08-12-2014
  2. 2. IndustryGrowthProspective-Catalysts 1 Industry size ~ $181 billion AUD with an average annual revenue growth rate of 1.1% where big four banks accounts for approximately 85% of total revenue. (IBISWorld) Total credit growth of 5.4% over the year to September is strongest since February 2009. Annual housing credit growth at 6.7% in 2014. (Expect this trend to continue Dependent on QE). Sources: APRA; RBA
  3. 3. IndustryGrowthProspective- Catalysts(cont) Household and business deposits have grown to almost double during the last 5 years. Business revenue increasing while deleveraging. Gross impaired loans decreasing due to low interest rates resulting in an increase in bank earnings. 2
  4. 4. Quantitative Easing Immediately after GFC, debt provision stricken (tighter debt markets) which resulted in increased loan losses for banks. Artificial low interest rates are now 1. Driving up collateral asset values triggering write back gains 2. Reducing the interest burden for borrowers thus reducing the emergence of new impaired loans Quantitative easing inflates bank earnings and reinforces investor preference for their dividend. Dividend yield looks attractive compared to broader market and bond yield. Implications of QE-exit: Australian bank earnings will be negatively impacted with falling interest rates: 5bp NIM movement swings bank earnings by approximately 3%. A seemingly modest 1.3bp shift in the loan loss charge move bank earnings by approximately 1%. 3
  5. 5. Loan loss charge and ROA Return on Asset growth stable and increasing. This is benefited from low loan loss charge and increase in write back gains. Historical observation: CBA, NAB and WBC loan loss charge currently are at cyclical low end of historical average 4
  6. 6. Dividend yield, PE and Net Interest Margin Australian banks offer higher dividend yields compared to other Asian banks and subsequently are attractive to international investors This dividend play has resulted in a high level of confidence in Australian Banks and as such has driven their P/E multiples higher relative to other Asian Banks. However, Weakening of AUD could trigger international investors to sell Australian banks regardless of their yield offerings. Contraction in NIM pre GFC was not from competition but from less business lending and more housing lending. Loans grew faster than deposits. Post GFC Australian banks have raised lending rates along with deposit rates (deposit rates have gone up at a higher rate), thereby NIM decreasing. 5
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  8. 8. Earnings, ROE and Basel 3 Earnings: Declining loan losses and increases in write back gains had a positive effect on bank earnings. DPS outpaced EPS due to high dividend payout ratio (around 70%+). Return on Equity: ROE of major banks between 15-20%. We believe that ROE for the banks will be in a slight decline over the coming two years. Basel 3: Target CET 1 proposed (Murray Report) to be raised to 12% from average 9% along with an increase in mortgage risk weight from 14-18% to 25-30%... Will have a dampening impact on earnings growth as the banks balance sheets become more conservative. Revised mortgage risk weight translates into additional AUD $3-7 billion per major bank respectively. Target CET 1 projected to be achieved by the banks between early to mid 2016. 7
  9. 9. Property Market With Australian cash rate currently at 2.5% (US 0.25%), Major banks home loan rate stays between 5.88%- 5.99%. Australian banks impaired assets continue to decline how long can this continue? remains to be seen. 8 Stable average growth rate of ~1% with the absence of high credit growth.
  10. 10. Property Market (cont) Loan loss provision coverage ratio is an indicator of how protected a bank is against future losses. A higher ratio means the bank can withstand future losses better, including unexpected losses beyond the loan loss provision. 9 Housing credit growth has been increasing prefaced by the fact that Australian home loan products are still far less risky than US.
  11. 11. Global banking Perspective Australian banks weathered against the increasing loan losses much better than other countries during and post GFC period. High international ownership make the banks more vulnerable to bouts of profit making during period where weaker AUD is expected MARCH 2014 (ANZ: 27%, CBA: 21%, NAB: 22%, WBC: 22%) High dividend payout ratio has also been an attraction for international investors. 10
  12. 12. Big four Banks highlights ANZ Cash earnings of A$3.5bn in 1HFY14 4 bps decline in 1H14 NIM ANZ targeting a below 43% cost to income ratio by FY16 currently at 52%. ANZ target dividend payout is still 5-10% below its peers ANZ derived 20% of its earnings from Asia, Pacific, Europe, America division. Target increased to 25- 30% by 2017 ANZ has 27% international institutions shareholdings ANZ has 42% retail investor shareholding CBA Cash earnings of A$2.2bn in 3QFY14 Loan loss charge declined to 14 bps in 3Q14 (1H14 16bps) CBA trading at PE premium to its peers since 1998 recurring but inconsistent CBA has 27% international institutions shareholdings CBA has 53% retail investor shareholding 11
  13. 13. NAB Cash earnings of A$3.15bn in 1HFY14 ROE decreased by 6% due to poor business profitability in UK Potential to outperform if EPS matches or goes above peers UK business sector underperform. Increased CRE exposure. NAB has 22% international institutions shareholdings NAB has 45% retail investor shareholding WBC Cash earnings of A$3.8bn in 1HFY14 12bps loan loss in 1H14 from 16bps in FY13 5bps decline in 1H14 NIM WBC has been outperforming major banks in CY14 thus far CET1 of 8.82% declines to 7.96% on a notional ex- dividend basis (therefore a capital raise is looming). WBC has 22% international institutions shareholdings WBC has 49% retail investor shareholding 12 Big four Banks highlights (cont)
  14. 14. Funding & Capital Snapshot 13 2014 2013 Wholesale funding as percentage of total funding ANZ 29% 30% CBA 36% 37% NAB 42% 42% WBC 31% 30%
  15. 15. Conclusion Credit growth is stable but slow which is supported by resilient Australian dollar. Australian banks offer higher dividend yield compared to other banks in region. Australian bank earnings inflate due to increased write back gains and decreased loan loss by up to 10% Collateral asset values increasing with QE-lowered borrowing rates. Housing prices dependent on Quantitative easing. Attractive dividend yields of 5.4% will continue to persist if Quantitative easing program continues. 14