November 2014

Looking Beyond Australian Bank Results
Australia’s Big Four banks once again delivered a stellar performance for the year amid a precarious market environment that embodied regulatory concerns, moderate economic conditions and wavering investor confidence. The banks year-on-year combined headline cash earnings for 2014 increased by close to six percent, reaching an impressive A$28.6 billion.

Modest expansions in core business sectors, reduced bad debt and growth in regional earnings were the main profit drivers for the banks, albeit with varying degrees of success.

This year, ANZ’s unique regional strategy distinguished the bank from its competition. Leverage from fast-growing Asian economies resulted in a 25 percent increase in reported cash profit from its international division, which combined with Australia and New Zealand franchises boosted ANZ’s fiscal earnings by 10 percent to A$7.1 billion.

In contrast to ANZ’s ‘super regional’ strategy which successfully captured regional growth opportunities, NAB has redirected its focus towards domestic operations. Provision impairments for its UK division exceeding A$1.5 billion coupled with a write-down dragged NAB’s cash earnings lower by 10 percent, resulting in a net profit fall of 1.1 percent.

Despite the underperformance, NAB still exhibits substantial dominance in the domestic business sector. With the expected UK exit, a refocus on Australia and New Zealand franchises and strong business credit demand, the bank is expected to rebuild its balance sheet strength.

CBA and Westpac both recorded solid profit earnings as a result of core business growth, with all key earning indicators consistent with the broader industry outlook. Consumer and mortgage growth were the main factors.

CBA reported a ‘profitable growth’ in the market via strong new business activity, boosting first quarter earnings by nearly 10 percent. Despite a spate of financial planning legal controversies throughout the year, CBA’s wealth management arm succeeded in expanding assets under management by 3.5 percent in the first quarter, providing sound support for the bank’s A$2.3 billion unaudited quarterly earnings.
Similarly, Westpac’s growth was also buoyed by improved market share and lending. In the second half of 2014, Westpac’s residential mortgage and business lending scope increased by 1.3 and 1.4 times the average respectively, outperforming its Big Four rivals.

The customer count for its wealth management and financial services arm also grew by 6 percent, reflecting successful executions of the bank’s customer centric strategies. Westpac announced a full year cash profit of A$7.62 billion up to September 2014, representing an 8.0 percent increase.

The magnitude of the Big Four’s profit was significantly affected by a broad fall in bad debt provisions as households continued to exploit the low interest rate environment, paying down debt ahead of schedule. The aggregate bad debt expense across the four banks fell by A$1.5 billion, making up 65 percent of total pre-tax profit growth.

Overall, the banks delivered an exceptional performance. An aggregated return on equity result of 15.5 percent within the current economic environment highlights the resilience of the industry and essential contribution they make to the economy.

The impact of the Murray inquiry was a special point of interest highlighted in this round of results. All four banks reported a level of CET1 that’s above the threshold of Basel III while simultaneously expanding lending activity by 7 percent. This allowed the banks to create a superficial compliance to the upcoming regulation without making sacrifices to their core operations.

Such outcomes steered the market’s focus away from the actual direction of the report and generated a sense of complacency, as the results were conceived during a period of historically low bad debts, heightened levels of deposits and moderately stable economic conditions.

Nonetheless, the current level of safe capital is deemed optimal for financial stability without home lending sacrifices. Therefore should the market accept the current position or demand a higher capital buffer?
Full Year Australian Bank Results
Cash Earnings (A$ billion) 7.1 8.7 5.4 7.6
Bad Debts (A$ million) 989 953 877 650
NIM (%) 2.13 2.14 1.93 2.08
CET1 (%) 8.8 9.3 8.6 9.0
ROE (%) 15.4 18.7 11.8 16.4

ANZ, NAB and Westpac results reported 12 months to September 2014
*CBA results reported 12 months to June 2014


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