{"id":19379,"date":"2019-11-14T07:08:57","date_gmt":"2019-11-14T07:08:57","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=19379"},"modified":"2019-11-14T07:08:57","modified_gmt":"2019-11-14T07:08:57","slug":"australia-major-banks","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2019\/11\/14\/australia-major-banks\/","title":{"rendered":"Australia: Major banks"},"content":{"rendered":"<h2>Summary<\/h2>\n<p>Our review of APRA&#8217;s June 2019 quarterly report on the four major banks &#8212; Commonwealth, Westpac, ANZ and NAB &#8212; concludes that they are collectively priced at a 16.5% premium over fair value.<\/p>\n<p>Technically, the ASX 300 Banks Index ($XBAK) is experiencing secondary selling pressure and a correction is likely.<\/p>\n<p>A correction would reduce the premium over fair value and may present buy opportunities.<\/p>\n<h2>Valuation<\/h2>\n<p>We project:<\/p>\n<ul>\n<li>long-term asset growth at 3.0% p.a. (down from 4.0%);<\/li>\n<li>net interest margins at 1.65% of average total assets (down from 1.70%);<\/li>\n<li>non-interest operating income of 0.5%;<\/li>\n<li>operating expenses at 1.05% (previously 1.10%);<\/li>\n<li>provisions for bad\/doubtful debts averaging 0.2%;<\/li>\n<li>additional equity capital required of $12 billion; and<\/li>\n<li>a 30% tax rate.<\/li>\n<\/ul>\n<p>That delivers a forward PE of 16.9 based on a market cap of $399 billion.<\/p>\n<p>We estimate that the major banks are priced at a 16.5% premium over fair value, based on a 12-year payback period*.<\/p>\n<p><em>*Note to readers: we have simplified our model by removing the margin of safety and use a lower payback period instead.<\/em><\/p>\n<h2>Technical Analysis<\/h2>\n<p>The ASX 300 Banks index retreated below its rising trendline, warning of a correction. Follow-through below support at 7600 would strengthen the signal, with a target of primary support at 6750.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2018\/2019-11-14-xbak.png?w=525&#038;ssl=1\" alt=\"ASX 300 Banks Index\" \/><\/p>\n<h2>Book Growth<\/h2>\n<p>Total assets are the primary engine of bank revenue. Heady growth of the last two decades ended in 2015, when the ratio of total assets to nominal GDP (right-hand scale) started to decline. Nominal GDP also slowed (5.4% p.a. in June 2019) and is likely to restrict future book growth.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2018\/2019-11-05-majors-ta.png?w=525&#038;ssl=1\" alt=\"Majors: Total Assets Annual Growth and compared to Nominal GDP\" \/><\/p>\n<p>Household debt near saturation level, at close to 200% of disposable income, is another headwind to future book growth.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2018\/2019-11-06-aus-hhdebt.png?w=525&#038;ssl=1\" alt=\"Australia: Household Debt to Disposable Income\" \/><\/p>\n<p>Total asset growth of the major four banks slowed to 1.4% for the twelve months ended June 2019 and we have reduced our long-term projection to 3.0% per year.<\/p>\n<h2>Margins<\/h2>\n<p>RBA rate cuts are squeezing net interest margins, currently 1.73%, and we expect a long-term average of 1.65% of total assets.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2018\/2019-11-08-majors-margins.png?w=525&#038;ssl=1\" alt=\"Majors: Income &amp; Expenses\" \/><\/p>\n<p>Expenses declined to 1.09% of total assets but non-interest income, at 0.56%, is falling even faster.<\/p>\n<h3>Non-Interest Income<\/h3>\n<p>Fees and commissions &#8212; the major component of non-interest income &#8212; have suffered the largest falls. Transaction-based fees are the worst performer, while declining credit growth has reduced lending-based fees. The sharp drop in other fees, to 0.19%, is likely to be permanent as banks shed their wealth management operations.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2018\/2019-11-08-majors-fees.png?w=525&#038;ssl=1\" alt=\"Majors: Fees\" \/><\/p>\n<p>We project non-interest income to average 0.50% of total assets in the long-term.<\/p>\n<h3>Expenses<\/h3>\n<p>Operating expenses declined to 1.09% of total assets, as the majors attempt to cut costs in line with income, but personnel costs have proven sticky and are falling at a slower rate.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2018\/2019-11-08-majors-exp.png?w=525&#038;ssl=1\" alt=\"Majors: Operating Expenses\" \/><\/p>\n<h3>Non-Performing &amp; Past Due Assets<\/h3>\n<p>Charges for bad and doubtful debts remain low at 0.09% of total assets but we expect a long-term average of 0.20%.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2018\/2019-11-08-majors-charges.png?w=525&#038;ssl=1\" alt=\"Majors: Charges for Bad &amp; Doubtful Debts\" \/><\/p>\n<p>Impaired loans are falling as a percentage of total loans and advances but past due loans have climbed to 0.6%, reflecting mortgage stress.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2018\/2019-11-08-majors-impaired-pastdue.png?w=525&#038;ssl=1\" alt=\"Majors: Impaired Assets\" \/><\/p>\n<p>Provisions for impaired loans, however, are reasonable at 95.8% of impaired facilities including security held.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2018\/2019-11-08-majors-imp-provns.png?w=525&#038;ssl=1\" alt=\"Majors: Provisions for Impaired Assets\" \/><\/p>\n<h2>Capital<\/h2>\n<p>Common equity Tier 1 capital (CET1) remains low, with a CET1 capital ratio of 10.8% in June 2019, based on risk-weighted assets. CET1 as a percentage of total assets is a low 4.96%.<\/p>\n<p>The Reserve Bank of New Zealand has called for &#8220;<a href=\"https:\/\/thepatientinvestor.com\/index.php\/2019\/03\/14\/aussie-banks-get-a-wake-up-call-from-across-the-tasman\/\">more skin in the game<\/a>&#8220;, asking the big four Australian banks to increase their capital holdings in New Zealand subsidiaries by $12 billion:<\/p>\n<blockquote><p>The RBNZ proposal calls for systemically important banks to hold a minimum of 16% Tier 1 capital against risk-weighted assets, of which 6% would be a regulatory minimum and 10% would act as a counter-cyclical buffer to absorb losses without triggering \u201cresolution or failure options\u201d.<\/p><\/blockquote>\n<p>A similar move by APRA is unlikely but RBNZ presents a problem for the big four banks as they will have to raise additional equity to capitalize their NZ subsidiaries. One alternative is to raise equity through a separate listing of their NZ subsidiaries but this is still likely to dilute returns on equity.<\/p>\n<h3>Return on Equity<\/h3>\n<p>Declining return on assets and increased capital requirements are both exerting downward pressure on return on equity (ROE), from a peak of 20.5% in 2007 to 9.7% in March 2019.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2018\/2019-11-08-majors-roe.png?w=525&#038;ssl=1\" alt=\"Majors: Return on Total Assets &amp; Return on Equity\" \/><\/p>\n<h2>Management &amp; Culture<\/h2>\n<p>Australian regulator APRA is suffering from regulatory capture. A 146-page <a href=\"https:\/\/www.theaustralian.com.au\/commentary\/apras-samesame-approach-undercuts-reform-zeal\/news-story\/c432058007c2c968afb8e141c41094cf\">capability review<\/a>, stemming from David Murray&#8217;s <a href=\"https:\/\/www.smh.com.au\/business\/banking-and-finance\/murray-inquirys-key-recommendations-20141207-121w56.html\">Financial System Inquiry<\/a> found APRA &#8220;slow, opaque, inefficient, and in urgent need of a culture and leadership overhaul.&#8221;<\/p>\n<h4>Disclosure<\/h4>\n<p>Staff of The Patient Investor may directly or indirectly own shares in the above companies.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Summary Our review of APRA&#8217;s June 2019 quarterly report on the four major banks &#8212; Commonwealth, Westpac, ANZ and NAB &#8212; concludes that they are collectively priced at a 16.5% premium over fair value. Technically, the ASX 300 Banks Index ($XBAK) is experiencing secondary selling pressure and a correction is likely. A correction would reduce &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/thepatientinvestor.com\/index.php\/2019\/11\/14\/australia-major-banks\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Australia: Major banks&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[40,3799,31],"tags":[208,214,4160,613,4159,2395,2439,3647],"class_list":["post-19379","post","type-post","status-publish","format-standard","hentry","category-australia-nz-countries-regions","category-asx-growth","category-the-fed-banks-interest-rates","tag-anz","tag-apra","tag-book-growth","tag-cba","tag-fee-income","tag-nab","tag-net-interest-margins","tag-wbc"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Australia: Major banks - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Australia: Major banks - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Summary Our review of APRA&#8217;s June 2019 quarterly report on the four major banks &#8212; Commonwealth, Westpac, ANZ and NAB &#8212; concludes that they are collectively priced at a 16.5% premium over fair value. 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He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters. Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis. Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008\/2009 and 2020 bear markets well ahead of actual events. He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.","sameAs":["https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/","https:\/\/www.instagram.com\/colin_thepatientinvestor","https:\/\/au.linkedin.com\/in\/colintwiggs"],"url":"https:\/\/thepatientinvestor.com\/index.php\/author\/investor\/"}]}},"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9tQ4n-52z","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":22704,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/11\/18\/the-major-banks-anz-cba-nab-wbc\/","url_meta":{"origin":19379,"position":0},"title":"The big four banks: ANZ, CBA, NAB &#038; WBC","author":"Colin Twiggs","date":"November 18, 2020","format":false,"excerpt":"We consider Commonwealth Bank (CBA) to be over-priced relative to its peers and currently hold ANZ (2% of portfolio value) and NAB (1%) in the Australian Growth portfolio. Valuation ANZ We reduced our estimate of fair value for Australia & New Zealand Banking Group (ANZ) to $25.08 per share, maintaining\u2026","rel":"","context":"In &quot;Australia &amp; NZ&quot;","block_context":{"text":"Australia &amp; NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":19491,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/11\/27\/national-australia-bank-nab\/","url_meta":{"origin":19379,"position":1},"title":"National Australia Bank (NAB)","author":"Colin Twiggs","date":"November 27, 2019","format":false,"excerpt":"Stock: National Australia Bank Exchange: ASX Symbol: NAB Date: November 27, 2019 Latest price: $26.18 AUD Market Cap: $75.4 bn Fair Value Estimate: $24.70 Forward P\/E: 12.5 Fair Value Payback: 12 Years Financial Y\/E: 30 September Recommendation: Hold Sector: Finance Industry: Major Banks Investment Theme: Dividends & Growth Structural Trends:\u2026","rel":"","context":"In &quot;Australian Growth&quot;","block_context":{"text":"Australian Growth","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investment-allocation\/asx-growth\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":18588,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/08\/01\/australian-banks-still-overpriced\/","url_meta":{"origin":19379,"position":2},"title":"Australian banks: Still overpriced","author":"Colin Twiggs","date":"August 1, 2019","format":false,"excerpt":"Summary We have just completed a review of Australia's four major banks -- Commonwealth, Westpac, ANZ and NAB -- and conclude that they are collectively overpriced by 23.5 percent. Our review is based on APRA's quarterly reports, where the four banks can be viewed as a collective unit. The ASX\u2026","rel":"","context":"In &quot;Australia &amp; NZ&quot;","block_context":{"text":"Australia &amp; NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":38352,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/10\/27\/australia-and-new-zealand-banking-group-anz-3\/","url_meta":{"origin":19379,"position":3},"title":"Australia and New Zealand Banking Group (ANZ)","author":"Colin Twiggs","date":"October 27, 2022","format":false,"excerpt":"Stock: Australia and New Zealand Banking Group Exchange: ASX Symbol: ANZ Date: 27-Oct-22 Latest price: A$24.92 Market Cap: A$74.5 bn Fair Value: A$28.67 Forward DY: 5.5% Payback (Years): 13 Financial Y\/E: 30-Sep-23 Rating: HOLD Sector: Financial Industry: Banks Investment Theme: Dividends & Growth Macro Trends: Defensive Summary Australia and New\u2026","rel":"","context":"In &quot;Australian Growth&quot;","block_context":{"text":"Australian Growth","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investment-allocation\/asx-growth\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":38666,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/11\/09\/national-australia-bank-ltd-nab\/","url_meta":{"origin":19379,"position":4},"title":"National Australia Bank Ltd (NAB)","author":"Colin Twiggs","date":"November 9, 2022","format":false,"excerpt":"Stock: National Australia Bank Ltd Exchange: ASX Symbol: NAB Date: 9-Nov-22 Latest price: A$31.66 Market Cap: A$99.8 bn Fair Value: A$29.67 Forward DY: 4.6% Payback (Years): 13 Financial Y\/E: 30-Sep-23 Rating: HOLD Sector: Financial Industry: Banks Investment Theme: Dividends & Growth Macro Trends: Defensive Summary National Australia Bank Ltd (NAB)\u2026","rel":"","context":"In &quot;Australian Growth&quot;","block_context":{"text":"Australian Growth","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investment-allocation\/asx-growth\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":18186,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/05\/10\/asx-200-and-the-banks\/","url_meta":{"origin":19379,"position":5},"title":"ASX 200 and the Banks","author":"Colin Twiggs","date":"May 10, 2019","format":false,"excerpt":"The ASX 200 retreat below support level at 6350 has been gentle, with a long tail indicating that buying support remains. The Trend Index likewise shows only a moderate decline. Respect of support at 6000 would be a bullish sign. Financials are the largest sector, comprising 32.1% of the ASX\u2026","rel":"","context":"In &quot;Australia &amp; NZ&quot;","block_context":{"text":"Australia &amp; NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19379","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=19379"}],"version-history":[{"count":4,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19379\/revisions"}],"predecessor-version":[{"id":19440,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19379\/revisions\/19440"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=19379"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=19379"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=19379"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}