| Kreston Dormers Financial Services Pty Ltd |
Please find below and attached our 'Weekly Market Update'.
We are continuing to get feedback and suggestions for improvement on the report, so if you have any suggestions please let us know
If you would like to discuss this email in more detail, please contact your financial adviser, Mark Johnson or Nick Pike on 1800 064 959.
Market Summary
The market took a breather this week with the S&P/ASX 200 down -0.6%. The Banks fell -2.8% which was an exact opposite of Materials which rose 2.8%.
|
| |
Friday |
Week |
% |
| All Ordinaries |
4,704 |
-22 |
-0.5 |
| S&P / ASX 200 |
4,683 |
-30 |
-0.6 |
| Property Index |
897 |
4 |
0.4 |
| Utilities Index |
4,199 |
32 |
0.8 |
| Financials Index |
4,648 |
-133 |
-2.8 |
| Materials Index |
12,052 |
323 |
2.8 |
| Energy Index |
15,817 |
-79 |
-0.5 |
 |
|
Overseas, the US S&P 500 rose 0.7% for the week despite falling 1.3% on Thursday night. On the other hand the UK FTSE was 0.2% weaker. In Asia the Nikkei continued underperforming other markets and was down -3.4% for the week. Hong Kong’s Hang Seng was again positive rising 1.1% and has had 9 positive results in the past 11 weeks.
Our feature section reviews the Australian banking sector with a focus on the big 4 banks – how they are going financially and what growth strategies they are pursuing. We have included a number of investment terms in the feature section.
|
Overseas News
In the US, retail sales increased 1.4% in October after falling 2.3% in September. Complementing this news was that inventories fell to the lowest level in four years. This is a positive as inventories will need to be replenished resulting in increased production, more jobs and so on.
The catalyst for the choppiness in the US share market this week was an unexpected decline of 10.6% in US housing starts. The fall was attributed to the uncertainty of the government tax credits program which like our First Home Buyers grant is intended to encourage new home building. The US Congress approved an extension to the program this month which should strengthen home starts next month. However it does illustrate that the recovery is still dependent on government stimulus programs.
There has been a very interesting exchange of economic ‘advice’ between US and Chinese officials.
US Federal Reserve Chairman, Ben Bernanke stated that it was ‘not obvious’ that asset prices (shares etc) are out of line with underlying values although he added that it was ‘extraordinarily difficult’ to judge. Thus he did not see the need to raise interest rates in the short term.
This is in contrast to Chinese officials warning that low interest rates in the US and thus a low USD is increasing prices in assets offshore (refer Carry Trade review in last week’s update).
Both seem to be ‘talking their own book’.
The US Fed wants to keep interest rates low while the economy is recovering and see the low USD as encouraging exports. Also they see that China is artificially keeping their yuan exchange rate low to provide Chinese exporters an advantage.
The Chinese on the other hand would like to see US interest rates and the USD to rise to allow them to increase Chinese interest rates and the yuan exchange rate without impacting the competitiveness of their producers.
|
Australian News
Gas pipeline owner/operator Hastings Diversified Utilities (HDF) received confirmation of their bank finance for the construction of a gas pipeline from Queensland to South Australia. Also on a positive development for their ownership of South East Water in the UK, the sale of a similar asset in the UK by another company received a better than expected price. There has been considerable speculation that HDF might unload their South East Water investment to focus on Australian-based pipeline opportunities.
Crane hirer, Boom Logistics (BOL) rejected a takeover from McAleese Investments and announced a 1 for 1 capital raising of $67 million at $0.30 per share. Proceeds of the equity raising will be used to reduce debt, and fund future projects.
NAB bought a Hong Kong based investment advisory firm, Calibre Asset Management, for ‘less than $5 million’. While the purchase is small, it does suggest that Asia remains firmly in NAB’s sights. A somewhat related question is whether NAB plan to add to their small US-based bank located in South Dakota purchased in late 2007.
After strong demand for its convertible preference share issue, ANZ increased the capital raising from $750 million to $1.7 billion. The bank is maintaining surplus capital with further Asian acquisitions in mind.
|
The Big 4 Banks - Getting Bigger
As most if not all clients have an exposure to our Big 4 banks we thought a comparison and analysis of each of the banks and the industry would appropriate.
Each of our big four banks are emerging from the credit crisis stronger than when we entered it in late 2007. Below we show some key financial data demonstrating the very solid financial position of each of the banks and how well they are placed from a strategic perspective.
Financial Position – Year Ended 30/9/2009
| Bank |
ANZ |
CBA |
NAB |
WBC |
| |
|
|
|
|
| Current Price ($) |
22.42 |
54.06 |
28.84 |
25.75 |
| All Time High ($) |
31.74 |
62.16 |
44.84 |
31.32 |
| Year Low |
11.89 |
24.74 |
16.03 |
14.60 |
| |
|
|
|
|
| Underlying NPAT ($m) |
3,882 |
4,611 |
4,075 |
3,777 |
| Gross Dividend Yield ($m) |
6.5 |
6 |
7.2 |
6.4 |
| |
|
|
|
|
| Next FY PER (x) |
11.2 |
15.2 |
13.7 |
17.6 |
| Next FY Div Yield (%) |
5.4 |
4.9 |
5.4 |
4.9 |
| Next FY Gross Div Yield (%) |
7.6 |
7.1 |
7.8 |
7.1 |
| |
|
|
|
|
| Net Interest Margin (%) |
2.38 |
2.1 |
2.16 |
2.38 |
| Income to Expense Ratio (%) |
45.7 |
46.5 |
43.9 |
47 |
| |
|
|
|
|
| Net Impaired Loans ($m) |
2,880 |
2,481 |
3,949 |
3,770 |
| Net Impaired Loans (%) |
0.83 |
0.65 |
0.92 |
0.88 |
| |
|
|
|
|
| Credit Impairment Provision ($m) |
4,526 |
4,954 |
4,401 |
4,384 |
|
|
Price
Banks’ share prices have ‘run hard’ since their lows of early 2009 and are one of the best performing sectors in the market in the recovery to date. The CBA has risen by over 100% while the others are approaching that mark.
Are they overpriced ? The analysis below would suggest that is not the case. Although there may be some short term softening which we have seen over the past week or so, the banks still present a strong investment proposition.
|
Underlying NPAT
After taking out one-off items, (and typically there are many with banks), each of the banks are delivering profits after tax of between $3.8 billion and $4.6 billion. If you consider that the last year included the height of the financial crisis globally and despite falling over the past year, the profit results are strong. While this reflects the strength of the Australian economy, the banks have performed well in their own right.
|
Yields
Gross yields (include franking credits) are still expected to be a very healthy 7% or greater for the next financial year.
|
Net Interest Margins and Cost to Income Ratio
Net Interest Margins (the difference between interest from the banks lending and deposits) have been rising over the past year. The banks’ competition has been ‘falling away’ and their competitors have been tightening access to lending. Borrowers have had little option but to take the higher margins as there is nowhere else to go.
The Cost to Income Ratio is a measure of efficiency or what it costs to generate the revenue of the bank. In the 1990’s getting below 50% was the aim of all of the banks. Each of the Big 4 now operate well below that benchmark.
|
Net Impaired Loans and Provisions
Impaired loans represents the value of loans that are not meeting loan agreements e.g. they have missed interest or loan repayments or the customer has exceeded their overdraft. The Impairment Provision is the amount set aside by the bank to cover the losses from the Impaired Loans.
In the recent reporting season the banks reported a ‘levelling off’ of the rate of impairment on their loan books. This is consistent with the economy returning to growth and the rise in unemployment being much more ‘muted’. Low interest rates will also be assisting this trend.
A comparison of Impaired Loans to Provisions above for each of the banks shows a reasonable buffer for future loans ‘going bad’. CBA and ANZ would appear to be the best ‘covered’ while NAB and WBC have less coverage.
|
Summary of Financials
The banks are generating strong profits, interest margins have been increasing and impaired loans are levelling out. As a sector, and individually, the financial results can only be described as positive.
From a financial perspective, ratings agencies place all 4 banks in the top eight banks globally.
|
Bank Strategies – there are differences
The bulk of the banking businesses for the Big 4 are located in Australia so from that perspective they all ‘swim in the same pool’ (they also swim in the New Zealand pool).
The most significant strategic positive over the past year has been the marked reduction in competition from smaller regional banks (St George and Bankwest acquired by Westpac and CBA) and non-bank finance providers as these competitors have not been able to access money to on-lend to customers. This has allowed banks to increase their share of lending (and deposits), increase margins and strengthen lending arrangements to avoid losses.
Coupled with the better than expected economy in Australia, the banks are reaping the very significant gains from this reduction in competition..
|
But there are differences.
The CBA has the largest retail (Mum’s and Dad’s) business while NAB is the strongest in the small to medium business sector.
The ANZ is pursuing an Asia growth strategy while the NAB still owns 2 banks in the UK and a small bank in the US. NAB like ANZ is expanding in Asia but not as aggressively as ANZ.
CBA and Westpac are focussed on ‘bedding down’ their acquisitions of Bankwest and St George which were bought at what are now (and then) very attractive prices.
|
Wealth Management is a focus
Since ANZ bought out the remaining 50% of the ING wealth management joint venture, each of the Big 4 have become major players in wealth management (e.g. superannuation, insurance). ANZ and NAB are also using these capabilities in Asia.
|
Increased regulation may dampen future growth
Governments around the world are increasing regulation in an attempt to avoid future banking crises. The measures proposed (and in some cases implemented) have ranged from limiting executive salaries to requiring banks to put away more capital (strengthen their balance sheets).
The Australian banks views are that due to good management they have emerged from the Financial Crisis financially strong. This is partially true. APRA, the banks’ regulator should take some of the credit and also we do not have the fundamental flaws that the US has in its housing market (remember sub-prime ?). Regardless of the banks’ views there will be increased regulation.
The result will be that growth in bank earnings will be more limited to what they might have been without the increased regulation. However, if implemented well, the increased regulation may have a positive economic effect in that growth will be less ‘debt fuelled’ and more sustainable.
|
Conclusions
The Big 4 banks are financially strong and in a strategic ‘sweet spot’ as domestic competition has fallen away. From an investment perspective they present a strong investment proposition.
|