Macquarie/East & Partners product profitability analysis shows vital divergence
(26 June 2013 – Australia) The sixth edition of the Macquarie/East & Partners spotlight series focuses on business banking performance from the product penetration/churn/customer acquisition perspective.
Titled Australian Banks; The great product divide, the report focuses on product profitability within a low-growth economic environment and how improving product penetration and profitability is vital.
National Australia Bank (NAB) and Westpac have plenty of opportunity, with the report predicting at least 5 percent in earnings.
The product profitability analysis showed a strong divergence between the majors in terms of revenue, cost and profit per product.
ANZ and NAB dominate the SME/corporate product profitability class (20 percent above average), while Westpac dominates institutional product profitability (40 percent above average).
The best-in-class analysis showed that NAB and Westpac have the largest upside from increasing product penetration, with an upside of at least 5 percent.
"While our best-in-class analysis shows upside for NAB and WBC, whether banks can/will execute on the opportunity is the issue. Franchise strength is a key enabler to execution in this sense," the report said.
In terms of franchise strength, ANZ and NAB were best placed, mainly due to a strategic advantage over the retail banks, with both banks dominating either market share, profit per product or share of wallet in business banking.
Commonwealth Bank of Australia (CBA) and ANZ were doing the best on product leads and sales; NAB is doing the worst on churn.
"Our product penetration conversion analysis is a spot check on current product penetration performance."
"Our analysis shows that NAB is generating the most new product leads (20+ leads per 100 customers), but CBA continues to have the highest conversion rate (over 30 percent)."
"However, when leads and conversion are taken into account, CBA and ANZ come out on top. We note, however, that given CBA&#8223;s starting position, this simply means over time it may start to approach the product penetration of other banks."
On churn, East & Partners are expecting a broadly flat picture for the sector, except for NAB, where churn is expected to pick up substantially in SME and Corporate (from 3 to c6 percent in FY14).
Synthesising the potential upside, franchise strength and execution capability suggests that ANZ is the best-placed to extend its advantage, followed by NAB, Westpac and then CBA.
"As a result of our analysis, we upgrade our ANZ earnings forecasts by 1-2 percent. We change our order of preference with NAB still our top pick, followed by ANZ, WBC and CBA," the report said.