Despite lingering economic uncertainty, Australia’s four major banks continue to deliver strong returns for Djerriwarrh shareholders. Portfolio Manager Brett McNeill shares insights from the recent bank reporting season.
ANZ, NAB and Westpac reported their full-year results to 30 September 2023, with Commonwealth Bank already having reported for the year to 30 June.
Returns across the cohort for the season were positive, underlining the impact of streamlined business models and simplified strategies adopted following the Royal Commission.
Despite a noticeable slowdown in the second half of the reporting period due to margin pressure, all four major banks demonstrated resilience and maintained solid balance sheets. Their capital levels comfortably exceeded APRA’s ‘unquestionably strong’ threshold of 10.25%, indicating a robust financial position.
Strategic positioning for growth
Each of the major banks showcased solid headline profit growth. While loan growth is expected to plateau compared to the past two years, the banks remain well-positioned for sound growth.
Ongoing mortgage and deposit pricing competition, leading to expected reductions in Net Interest Margins (NIM), and expected continuation of cost growth remain challenges. However, credit quality remains strong with high provisioning levels for bad debts in place.
We expect some impact from higher interest rates to flow through to consumers in the near future - this hasn’t really had an impact yet but takes time.
Net Interest Income (NII), a key factor in bank profits, displayed double-digit growth across all major banks. Commonwealth Bank led with an 18.5% increase, underlining its market prominence.
NIM | 2022 | 2023 |
ANZ | 1.63% | 1.70% |
CBA | 1.90% | 2.07% |
NAB | 1.65% | 1.74% |
WBC | 1.87% | 1.95% |
Operating Profit, a key metric indicating operational efficiency, also saw all four banks achieving strong growth. Westpac, with a 33% increase, led in this aspect, albeit reflecting the reversal of past ‘one-off’ costs that have impacted the bank in recent years.
NAB and Commonwealth Bank maintained leadership in cost efficiency, with Cost-to-Income ratios around 44%. Westpac has returned to a more ‘normal’ ratio, in line with ANZ at 49%.
There was a significant shift in impairment charges compared to the previous year, with CBA, Westpac, and NAB reporting bad debt charges between 9 and 12 basis points of total loans, showcasing a prudent approach to risk management.
Impairment Expense as % Average GLA’s | 2022 | 2023 |
ANZ | -0.04% | 0.04% |
CBA | -0.04% | 0.12% |
NAB | -0.02% | 0.11% |
WBC | -0.05% | 0.09% |
All major banks now boast double-digit Return On Equity (ROE), with Commonwealth Bank leading in this area. This demonstrates a robust financial performance and effective capital utilisation.
Cash ROE | 2022 | 2023 |
ANZ | 10.1% | 10.9% |
CBA | 12.7% | 14.0% |
NAB | 11.7% | 12.9% |
WBC | 7.4% | 10.1% |
Our views on the big four
We continue to view Commonwealth Bank as the highest quality bank, primarily due to its robust retail franchise. This is reflected by its Price to Book ratio of 2.3%, double that of ANZ and Westpac.
Dividend yields, based on the consensus forecast for FY24, indicate ANZ and NAB as comparatively more attractively valued. However, it's crucial to note that these yields are before franking credits, which significantly impact after-tax returns.
Dividend yields | |
ANZ | 6.5% |
CBA | 4.4% |
NAB | 5.9% |
WBC | 6.7% |
The major banks significantly contribute to Djerriwarrh’s portfolio, offering a reliable source of fully franked income.
With strong balance sheets and a consistent track record of delivering good income returns over the medium-to-long term, they play a pivotal role in shaping Djerriwarrh’s investment strategy, mirroring their substantial presence in the Australian equity market.