Company Results – Page 15 – Digital Finance Analytics (DFA) Blog

Bendigo and Adelaide Bank 1H 17 – Pressure Continues

Bendigo and Adelaide Bank released their 1H17 results today. Regional banks continue to feel the pressure of low interest rates, competition for deposit funding, and home loan demand. The overall result, once you look at it, is pretty weak. It was more to do with cost control and reduced provisioning than margin growth, even if on higher volumes.

Their cash earnings were up 0.4% from 1H16 to $224.7m, and the statuary net profit was $209m, little changed from 1H16. Return on equity was 8.77%, down from 9.10% in IH16. Return on tangible equity was 12.63% down from 13.15% IH16 and 12.71% 2H16. The dividend was held at 34c, with a payout ratio of 70.8%.

Whist total assets were up by 3.5% on 1H16 to $70.9b, net interest margin dropped 6 basis points to 2.1%. It may be recovering a little now thanks to repricing of loans but volume may be slowing as a result. Home lending was 70.6% of loans. They are close to the 10% investment lending speed limit, so that will also trim growth.

The expenses ratio improved, as shown by the Jaws momentum.

The Keystart loan acquisition meant their mortgage lending book grew 13.9%, but 6.8% excluding the acquisition. Residential loan approvals rose, including via third party channels, but broker loans seem to be slowing post the recent repricing.

There was a 9% growth in offset portfolio loans since December 2015. They say 45% of home loan customers are ahead with their minimum repayments. 29% of customers are 3 or more repayments ahead. Loan settlements are running at around $1.5m a month.

9% of loans are over 90% LVR.

The Bank benefited from rising property values in its Homesafe portfolio and remains sensitive to future price growth. They added (only) $2.5m of overlay in 1H17 increasing the total overlay to the value of the portfolio to $26.1m. Given the strong price growth in Sydney and Melbourne this seems low!

BDD were controlled, but residential arrears are rising a little. Great Southern is paying down as expected.

Bad debt provisions fell, partly thanks to a specific and large named, but now resolved risk.

Capital remains under pressure, with CET1 down to 7.97%. The move to advanced IRB (timing TBA) might help a bit, possibly.

All in all, they had to squeeze the lemon harder to drive a reasonable outcome, but we question whether the fundamentals are there for long-term sustainable and growing shareholder returns.

Suncorp 1H to Dec 2016 – Looking Better

Suncorp today reported net profit after tax (NPAT) of $537 million (HY16: $530 million) for the six months to 31 December 2016. Profit after tax from business lines increased 12.7% to $613 million (HY16: $544 million).

The Group has been working hard to get performance up, and despite pressure on banking margins, and adverse insurance claims from New Zealand, management of the insurance businesses is clearly tighter.

The result included natural hazard claims costs of $350 million (HY16: $362 million), Investment earnings of $79 million (HY16: $133 million), reserve releases of $131 million (HY16: $137 million) and a loss on sale of Autosure of $25 million.

After accounting for the interim dividend, the Suncorp Group’s Common Equity Tier 1 (CET1) is $448 million above the operating targets.

The General Insurance CET1 is 1.23 times the Prescribed Capital Amount and Bank CET1 is 9.20%. The Group has $230 million of franking credits available after the payment of the interim dividend.

Shareholders will receive an interim dividend of 33 cents per share fully franked (HY16: 30 cents) representing a payout ratio of 72% of cash earnings.

Insurance (Australia)

Insurance (Australia) NPAT increased 42.5% to $369 million due to top line growth, lower claims costs and disciplined expense management.
Gross Written Premium (GWP) growth of 6.2% was primarily driven by the CTP portfolio. Consumer Insurance benefited from industry stabilisation with Home and Motor GWP increasing 2.4% and 1.6% respectively.The Commercial Insurance market continues to be highly competitive with GWP growth of 0.4% reflecting a prudent approach to pricing and risk selection.

CTP GWP increased 27.3% due to Suncorp’s successful entry into the South Australian market and growth in New South Wales which was supported by improving claims metrics. Insurance (Australia) reserve releases of $149 million reflect the benign inflationary environment and Suncorp’s management of long-tail claims.

Banking & Wealth

The Banking & Wealth business delivered NPAT of $208 million reflecting improved operating expenses and strong credit quality. In response to some unsustainable competitor pricing, the Bank focused on profitable growth through the optimisation of price and volume.

Lending grew 2.5% over the past 12 months.

Total assets were $54.2 billion, of which home lending was $44.1 billion, half of which is in QLD. 65% of business came through intermediaries. High LVR loans are down significantly. Overall home lending grew below system. Deposit to loan ratio was 67.2% up a little on a year ago. During the half, the Bank funding mix changed with a 5.5% reduction in retail term deposits and an increase of 6.7% in at call deposits primarily driven by growth in personal transaction accounts.

Following a targeted campaign in December, the housing loan portfolio is expected to grow in the second half.

The net interest margin (NIM) of 1.78% was impacted by the lower cash rate and aggressive competition, however it remains within the target range of 1.75% to 1.85%.

Operating expenses improved by 5.8% resulting in a reduction in the cost to income ratio from 53.0% to 51.4%.

Gross non-performing loans improved by 14.3% over the past six months resulting in impairment losses of $1 million (less than 1bps), well below the target range of 10bps to 20bps of gross loans and advances.

The Bank has a tiered management limit structure for the LCR to ensure that an adequate buffer to the APRA prudential limit of 100% is held. The LCR is managed to market conditions and has been maintained comfortably above the prudential minimum since being introduced in January 2015. The average LCR for the half ending 31 December 2016 was 133%, ending the half at 130%.

The Bank is well placed to meet the proposed NSFR requirements, which will be introduced from January 2018. The Bank’s estimated NSFR at the end of the period was 106%.

Discussions continue with the APRA as part of progressing towards Advanced Accreditation. In parallel the Bank has undertaken changes to its processes and retail credit models as part of an industry wide alignment of the treatment of hardship. The Bank expects these changes to have some effect on reporting but no material impact to the risk or loss experience.

New Zealand

New Zealand NPAT of NZ$37 million was impacted by the Kaikoura earthquake and aftershocks (NZ$23 million) and new ‘over-cap’ claims from the 2010/11 Canterbury earthquakes (NZ$18 million) being notified by the Earthquake Commission (EQC).

Net incurred claims (NIC) were $372 million, up 22.8%, driven by the Kaikoura earthquake as well as several large commercial claims and strong unit growth in the consumer portfolios.

GWP growth of 4.8% was delivered primarily from the Home and Motor portfolios.

Included in the result was the New Zealand Life Insurance NPAT of NZ$18 million reflecting a 41.2% increase in underlying profits, and positive claims and lapse experience of NZ$5 million.

AMP Reports A Loss Of $344m

AMP reported their FY16 results today, a net loss of $344m compared with a profit last year of $972m last year. They also announced a share buy-back of up to $500m. The final dividend was maintained at 14 cents a share, franked to 90 per cent making the FY 16 dividend 28 cents a share.

It is a complex business, with many moving parts, and an offshore expansion strategy in sharp contrast to the major retail banks!

The business took a hit from a $415 million loss in Wealth Protection reflecting negative claims experience and capitalised loss.

Underlying profit was A$486 million compared with A$1,120 million prior year, reflecting actions announced in October 2016 to stabilise Australian Wealth Protection.

The wealth management businesses performed better, (AMP Capital, AMP Bank and New Zealand).

International expansion in China, Europe and North America continues. China Life AMP Asset Management Company (CLAMP) is the fastest-growing investment manager in China, with assets under management (AUM) rising 55 per cent year on year.

They focusses on cost management: A$200 million, three-year efficiency program completed in 2016 and a new efficiency target set for 2017.

They have a strong capital position with A$2.3 billion surplus on 1 January 2017 following consolidation of life companies. Underlying return on equity 5.6 per cent, down from 13.2 per cent in 2015, reflecting Wealth Protection performance.

Business unit results

Australian Wealth Management
The impact of difficult trading conditions was partly offset by effective cost and margin management. AUM was up 5 per cent to A$121 billion following a strong end to the year. Total net cash flows of A$336 million (FY 15: A$2.2 billion) were lower, consistent with an industry-wide slow down amid market and regulatory uncertainty. Improving customer sentiment underpinned a lift in discretionary contributions in Q4 2016.

Targeted product enhancements supported strong cash flows on AMP’s flagship North platform, with net cash flows up 11 per cent on FY 15 and AUM up 30 per cent. Cash flows from AMP Flexible Super reduced as flows switched to North as expected. Corporate super cash flows were lower reflecting the lumpy nature of mandates. AMP’s developing omni-channel advice network, campaigns to capitalise on a more favourable market environment, corporate super pipeline and further product enhancements are expected to support cash flows in 2017 and beyond.

AMP deliberately reduced adviser numbers in 2016 by tightening the classification of authorised representatives. A higher-than-usual number of advisers also decided to retire or leave the industry in the face of challenging industry conditions and increasing education and professional requirements.

AMP Capital
AMP Capital’s strong performance reflected increased fee income driven by growth in real estate and infrastructure investments. Controllable costs increased as the business continued to invest in international growth and build its distribution capability.

External net cash flows were A$967 million (FY 15: A$4.4 billion) and were impacted by challenging market conditions in Australia and Japan, partly offset by good institutional flows into real estate and infrastructure asset classes. FY 16 finished with a strong origination pipeline, including A$3.1 billion of available investor commitments. In China, CLAMP’s AUM increased 55 per cent year on year.

Australian Wealth Protection
Performance was impacted by negative experience and the actions to stabilise the business announced in October 2016, including strengthened assumptions, which led to a one-off capitalised loss of A$484 million. Total experience losses for the year were A$105 million. Claims experience inQ4 2016, capitalised and other one-off losses, and the reduction in embedded value were all within guidance provided in October 2016. AMP group’s reported earnings were also impacted by aA$668 million charge for goodwill impairment as a consequence of declines in the potential recoverable amount of the Australian Wealth Protection business.

The consolidation of AMP Life and NMLA – a Part 9 transfer – released A$145 million in regulatory capital on 1 January 2017, while a reinsurance agreement for 50 per cent of the AMP Life portfolio (25 per cent of total exposure) released a further A$500 million of regulatory capital. These actions underpinned the board’s decision to return capital to shareholders through an on-market share buy-back. The process for a second tranche of reinsurance is now underway.

AMP Bank
Above system growth in residential mortgages at 13% and expansion in net interest margin contributed to 15 per cent growth in operating profit.

The bank is investing in operational capacity to support continued growth, with retail mortgage sales via the aligned adviser channel up 24 per cent on FY 15. The bank’s cost to income ratio fell to 29 per cent as the bank benefitted from increased scale.

New Zealand Financial Services
Performance was driven by improved margins in wealth management and experience profits in the life insurance business. Excluding the effect of the loss of transitional tax relief, operating earnings increased 14 per cent, with tight cost management improving the business’s cost to income ratio. AUM increased 9 per cent, reflecting positive market performance and net cash flows.

Australian Mature
Operating earnings of A$151 million reflected anticipated portfolio run off and lower bond yields, partly offset by cost control and better persistency

Capital management

AMP continues to actively manage capital with Level 3 eligible capital resources A$2,195 million above minimum regulatory requirements at 31 December 2016, up from A$1,917 million at 1 July 2016. Effective 1 January 2017, the consolidation of AMP’s two life companies (AMP Life and NMLA) increased excess regulatory capital by a further A$145 million.

The strengthened capital position also reflects the execution of the reinsurance agreement.

Capital released from reinsurance provides the capacity for capital to be returned to shareholders.An on-market share buy-back of up to A$500 million will begin in Q1 2017.

A FY 16 final dividend has been maintained at 14 cents per share, franked at 90 per cent, with the unfranked amount being declared as conduit foreign income. The total FY 16 dividend is 28 cents a share. This reflects the largely non-cash nature of the one-off losses incurred in Australian Wealth Protection. AMP’s dividend policy target range is 70 to 90 per cent of underlying profit. The dividend reinvestment plan will be neutralised by on-market purchases.

Cost program

AMP’s three-year business efficiency program completed in FY 16 with A$200 million in pre-tax recurring run rate cost benefits delivered in line with expectations.

AMP is committed to a 3 per cent reduction in controllable costs in 2017, excluding AMP Capital and allowing for continued investment in growth businesses and channel experiences. AMP Capital will be managed on a cost to income basis, which is appropriate for the profile and growth ambitions of this business.

Genworth FY16 Results Highlight Changing Market Conditions

Lender’s Mortgage Insurer Genworth released their results to December 2016 today. From it, we get insights into the changing nature of the housing market, and also a view of the pressure LMI’s are under.

Genworth reported a statutory net profit after tax (NPAT) of $203.1m, down 10.9% on prior year. After adjusting for the after-tax mark-to-market move in the investment portfolio of $9.1m, underlying NPAT was $212.2m down 19.8% on prior year. The loss ratio was 35.1%, compared with 24% last year. They remain strongly capitalised, and though claims are higher, they declared a final fully franked dividend of $14.00, a FY16 payout ratio of 67.2%, but down from last half.

Banks are clearly writing less high LVR mortgages, thanks to APRA, and when households default, and are forced to sell, there is sufficient capital appreciation in most properties to avoid a LMI claim due to strong price rises. The banks, can’t loose! (Remember the LMI protects the bank, not the borrower). However, in regions where prices are falling – for example in the mining belts of WA and QLD, and home prices are falling, claims are up. This does not bode well if home prices were to revere more widely.

Genworth was listed in 2014, but since then has completed share buy-backs to reduce the number of issued shares. Further restructure will simplify the corporate structure in 2017, with a view to driving efficiency. They are the only separately listed LMI in Australia, (the banks have their own LMI captives, and the other player in the market is less transparent).

We will look at the market data they provided first, then look at the drivers of their results more specifically.

Genworth had an in-force portfolio of approximately $324 billion at Dec 2016. Standard LMI accounted for 91% of the book, and Low Doc 5%. 26% of the book relates to Investment loans.

The seasoning picture is interesting. This shows the evolution of Genworth’s 3 month+ delinquencies (flow) by residential mortgage loan book year, from issue.

The delinquency population by months in arrears aged buckets shows that over the past two years, the mortgagee in possession (MIP) as a proportion of total delinquency is trending down. This is because the strong property market has allowed stressed households to sell and release equity, with no LMI claim.

With regards to the current results, a range of factors influenced the lower outcomes.

New Insurance Written (NIW) fell 18.4% in FY16, to $26.6 billion. Moreover, NIW above 90% LVR decreased 39.8%, and 80-90% LVR fell 17.2%. This reflects changing appetite among lenders for higher LVR business, following regulatory intervention from APRA.

Lower Sales (Gross Written Premium – GWP) fell 24.8% compared to previous period due to the lower number of high loan-to-value (LVR) penetration in the market and a lower LVR mix of business.

The average price for Flow (GWP/NIW) decreased from 1.63% to 1.51% in FY16. However, they got some benefit from premium repricing in the second half.

Lower Revenue (Net Earned Premium) – NEP fell 3.6% reflecting lower earned premiums from current and prior book years.

Higher Net Claims Incurred – Net claims incurred increased by $46.1 m to $158.8m due to an increase in the number of delinquent loans relative to a year ago, and a higher average claim amount. The performance in QLD and WA is “challenging”, reflecting increased delinquencies, especially in resource exposed regions. NSW and VIC were better performers. Overall, the delinquency rate rose from 0.38% to 0.46%.

Whilst financial income (interest income and realised and unrealised gains/losses) increased by $18.1 m, to $126.0 m in FY16, the yield on the investment portfolio dropped 3.69%.

Regulatory capital fell from $2,600 m in 2015 to $2,213 m in 2016. CET1 decreased in FY16 mainly reflecting the $250 m of dividends, $202 m capital reduction and $86 m decrease in the excess technical provision, offset by $203 m NPAT. Tier 2 capital decreased following the redemption of $50 m of the $140 m notes issued. The PCA coverage ratio was consistent with FY15.

Macquarie Update Says In Line With FY16

Macquarie Group provided an update on business activity in the third quarter of the financial year ending 31 March 2017 (December 2016 quarter).

Macquarie currently expects the year ending 31 March 2017 (FY17) combined net profit contribution from operating groups to be broadly in line with the year ended 31 March 2016 (FY16).

Essentially, Macquarie’s annuity-style businesses’ (Macquarie Asset Management, Corporate and Asset Finance and Banking and Financial Services) combined December 2016 quarter net profit contribution was up on the December 2015 quarter.

For the nine months ended December 2016, net profit contribution¹ was slightly down on the prior corresponding period which benefited from strong performance fees in Macquarie Asset Management.

However Macquarie’s capital markets facing businesses’ (Commodities and Global Markets and Macquarie Capital) combined December 2016 quarter net profit contribution was down on the prior corresponding period largely due to subdued Equity Capital Markets (ECM) activity and the timing of transactions in Macquarie Capital.

For the nine months ended December 2016, net profit contribution was slightly down on the nine months ended December 2015 notwithstanding stronger activity across most of the businesses in Commodities and Global Markets except Securities, which benefited from strong Chinese equity market conditions in the prior corresponding period.

Macquarie Group’s financial position comfortably exceeds APRA’s Basel III regulatory requirements, with Group capital surplus of $A3.7 billion at 31 December 2016, in line with 30 September 2016. The Bank Group’s APRA Basel III Common Equity Tier 1 capital ratio was 10.5 per cent (Harmonised: 12.6 per cent) at 31 December 2016, up from 10.4 per cent at 30 September 2016. The Bank Group’s APRA leverage ratio was 5.3 per cent (Harmonised: 6.2 per cent) and average LCR was 174 per cent.

Here is a brief overview:

Macquarie Asset Management (MAM) had assets under management (AUM) of $A501.7 billion at 31 December 2016, up two per cent on 30 September 2016 predominately driven by positive foreign exchange and market movements. During the quarter, Macquarie Infrastructure and Real Assets raised $A1.4 billion in new equity, largely in Australian, Global and European Infrastructure funds; invested equity of $A1.9 billion including infrastructure in the US, Australia, UK and Mexico; and divested $A0.6 billion of assets in Germany and Mexico. Macquarie Investment Management was awarded $A1.6 billion in new, funded institutional mandates across ten strategies. Macquarie Specialised Investment Solutions continued to grow the Macquarie Infrastructure Debt Investment Solutions (MIDIS) business with total third party investor commitments of over $A6.1 billion and total AUM of $A3.5 billion.
Corporate and Asset Finance’s (CAF) asset and loan portfolio of $A37.9 billion at 31 December 2016 was broadly in line with 30 September 2016. Certain portfolios were impacted by unfavourable foreign exchange movements largely due to weakening GBP. AWAS and Esanda continue to perform in line with expectations. During the quarter, $A2.2 billion of motor vehicle and equipment leases and loans were securitised. The Lending portfolio had additions of $A0.6 billion across both primary and secondary markets equally. Notable realisations during the quarter included the exit of a toll road investment in Virginia in the United States.
Banking and Financial Services (BFS) had total BFS deposits⁵ of $A44.2 billion at 31 December 2016, up five per cent on 30 September 2016. The Australian mortgage portfolio of $A28.6 billion remained in line with 30 September 2016, while funds on platform of $A70.5 billion increased 14 per cent on 30 September 2016 largely due to the successful migration of the ANZ Oasis wrap super and investment assets onto Macquarie’s platform. The business banking loan portfolio of $A6.5 billion increased two per cent on 30 September 2016.
Commodities and Global Markets (CGM) was formed from the merger of Macquarie Securities Group and Commodities and Financial Markets to create an integrated, end-to-end offering across global markets including equities, fixed income, foreign exchange and commodities. The integration is progressing well. Strong results continued across the energy platform, particularly from Global Oil and North American Gas; and increased volatility in agriculture and base metals markets resulted in increased client hedging activity. Strong trading results were also experienced across financial markets businesses due to volatility associated with macro-economic events. Market conditions continued to impact client volumes in equity markets.
Macquarie Capital experienced solid levels of activity, particularly in infrastructure in Australia and the US, with 88 transactions valued at $A44 billion completed globally. Notable transactions included: exclusive financial advisor on the acquisition of a 50.4 per cent interest in the 99 year lease of Ausgrid for ~$A16.2 billion, the largest M&A transaction in ANZ in 2016 and largest infrastructure and utilities M&A transaction in ANZ⁶; advised Capital Stage on the €2 billion merger with CHORUS Clean Energy, creating one of Europe’s largest independent operators of solar and wind parks; financial advisor, lead left bookrunner and joint lead arranger on the acquisition financing for a portfolio of contracted thermal power plants in North America; and sole financial advisor and underwriter on MMG Limited’s $US512 million rights issue on the HK Stock Exchange.

NAB Q1 2017 Trading Update

NAB released their December 2016 trading update today.

It looks like revenue is running a bit below system, expenses are considerably higher, but the quarter was saved by a cut in bad and doubtful debt provisions. Impaired assets rose.

They say that un-audited cash earnings (their preferred measure although not a statutory financial measure, as it is not presented in accordance with accounting standards and excludes discontinued operations and “certain other items”) were about $1.6 billion, which is around 1% lower than the quarterly average of the September 2016 half year and 1% lower than the prior corresponding period.

They say revenue grew around 1%, thanks to higher trading income and growth in lending, whilst group net interest margin was broadly stable. Given mortgage system growth is running circa 6% annually at the moment though, this seems on the low side.

Expenses rose 5%, thanks to EBA, redundancies and project costs, and only partly offset by productivity savings which they say should deliver around $200m. They reduced FTE by 488.

They reduced the charge for bad and doubtful debts by 23% to $164m because the one-off provisions they made in September for mining and agribusiness were not repeated. However, impaired assets stood at 0.90% in December, up from 0.85% in September. Provision coverage of gross impaired assets rose from 38.3% to 43.0%.

The CET1 ratio was 9.5%, compared with 9.8% in September, reflecting final dividend payouts. They said they may issues new ASX-listed Subordinated Tier 2 capital security, depending on market conditions.

The group’s leverage ratio was 5.4% (APRA basis) and LCR was 124%.

Suncorp finalises execution on New Zealand Autosure disposal

Suncorp said today on 21 November 2016, Suncorp Group (Suncorp) announced that it had executed the sale of its New Zealand Autosure motor insurance business to Turners Limited.

The sale results in a release of capital of approximately A$30 million and a post-tax loss on disposal of A$25 million. The transaction will be accretive to the New Zealand business’s long term return on equity (ROE). The adjustment will be booked in the Group’s HY17 financial result as a non-cash item.

The New Zealand financial result will also be impacted by further claims arising from the 2010/11 Canterbury earthquakes and the 14 November 2016 Kaikoura earthquake.

2010/11 Canterbury earthquakes

The outstanding claims provision for the 2010/11 events has increased by NZ$112 million primarily due to the notification of new ‘over-cap’ claims from the New Zealand Earthquake Commission. While the majority of these costs will be absorbed by Suncorp’s reinsurance program, the Group expects to incur a net cost of NZ$18 million in the HY17 financial results.
Kaikoura Earthquake and Natural Hazard Costs

For the six months to 31 December 2016, natural hazard claims costs in Australia and New Zealand are estimated to be $350 million, $40 million above the natural hazard allowance of $310 million. This includes NZ$50 million for the net impact of the Kaikoura earthquake on 14 November 2016, $60 million for South Australian/Victorian storms in November 2016 and $50 million for Victorian/South Australian storms in December 2016.

Suncorp Group will present its financial results for the six months to 31 December 2016 on Thursday 9 February 2017.

Australia’s Major Banks Face More Profitability Pressure

According to Fitch Ratings, the operating profit of Australia’s four major banks is likely to come under further pressure in the next 12 months, as stress emanating from the mining and apartment-building sectors continues to undermine asset quality, says Fitch Ratings. However, Australian banks are still likely to remain highly profitable compared with their international peers, and are in a strong position to cope with capital pressures that might result from upcoming regulatory changes.

The four major banks – Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) and Westpac Banking (WBC) – posted the first drop in their combined pre-tax profit in eight years in the financial year 2016 (FY16). Pre-tax profit fell to AUD41bn (USD32bn), 7% lower than FY15. Profit was hit by a 36% increase in loan-impairment charges – albeit from a cyclical low – which reflected problems in the resources sector and its knock-on effects for businesses and households in mining areas. CBA was the only one to report pre-tax profit growth, of 2%. ANZ’s pre-tax profit dropped the most, by 22%, largely owing to restructuring costs and valuation adjustments. Further restructuring costs are likely in FY17, as ANZ says it is refocusing on the Australia and New Zealand market, and its profitable Asian institutional business. Restructuring costs also weighed on NAB’s pre-tax profit, but the sale of its UK business and partial sale of its life insurance operations are now completed and will not affect FY17 results.

Fitch expects Australia’s banks to face a weak operating environment again in FY17. Net interest margins are likely to be squeezed further by higher wholesale funding costs, and tougher loan and deposit competition. Falling mining investment and weaker employment in the resources sector will continue to weigh on the performance of banks’ mining sector exposure, despite the recovery of some commodity prices this year. Increased technology expenses and compliance costs will undermine efforts at cost management.

Property developers may also soon start experiencing problems settling agreed apartment sales, which may feed through to banks over the next 18 months. The decision by the four major banks earlier this year to stop lending to non-resident property investors means the latter are now likely to find it harder to source finance to complete agreed purchases, and may back out of deals.

Australia’s major banks are in a good position to cope with the weaker conditions, in our view, as their balance sheets are robust. All banks have issued additional common equity in the last 18 months to boost capital buffers in response to regulatory changes. Even with a drop in profitability they have the flexibility to meet increases in capital requirements that might come with the introduction of Basel IV or changes to the Australian Prudential Regulation Authority’s guidelines.

Moreover, their direct exposure to the mining and property development sectors is relatively small and manageable. Asset quality is likely to remain relatively strong in the absence of broader problems in the mortgage market, which dominates banks’ balance sheets.

High underemployment appears to be creating stress for some mortgage borrowers – arrears have risen over the last year, albeit to a still-low 1.14% of total mortgages. Moreover, high debt levels make households vulnerable to a rise in interest rates or further deterioration in the labour market. However, Fitch does not expect the Reserve Bank of Australia to start raising its cash rate until 2018, and the unemployment rate is likely to remain stable. Improvements in banks’ underwriting standards since mid-2015 should also provide a cushion, especially since the sharp increase in property prices since then has boosted the equity of earlier home buyers.

80% Of Main Retail Banks’ Profits – $25.6 billion – Returned to the Community – ABA

According to a release from the Australian Bankers Association, eighty per cent of the main retail banks’ profits – $25.6 billion – were returned to the community, primarily through dividend payments to everyday Australians who own bank shares directly and indirectly through their superannuation savings.

Banks again paid more tax than any other industry – $12.8 billion in 2016 – providing a valuable revenue stream to help fund the Federal Government’s provision of essential infrastructure such as schools and hospitals.

Banks continued to invest in initiatives to improve customer service, including a $6.9 billion spend on technology. This included a $1 billion investment in a new payments platform launching in 2017 that will allow customers to transfer money online between accounts in real time.

Australian Bankers’ Association Chief Executive Steven Münchenberg said banks needed to continue to perform well for Australia to have a strong and well-functioning economy.

“Given ongoing economic uncertainty here in Australia and overseas, it is as important as ever that our banks remain strong, stable and profitable,” Mr Münchenberg said.

“Bank profits provide an income stream for Australians through dividends, superannuation payments and interest on bank deposits and bonds; as well as to the Federal Government. Profitable banks also help fund economic growth through lending to business customers and homeowners, and in their role as significant employers.”

In 2016, $25 billion in wages was paid to the 140,000 people employed by the main retail banks. Households earned $66 billion in interest on bank deposits and bonds.

$600 million was provided in donations and ‘in-kind’ support to the not-for-profit sector and other community initiatives.

Mr Münchenberg said, like most industries, banks were facing tougher operating conditions in a low interest rate, low growth environment.

“In addition to finding growth in a challenging market, banks are also responding to increasing regulation and the challenges associated with rapid advances in technology and new market entrants,” he said.

“In this environment, it will be more important than ever that banks work hard to get the balance right between looking after their customers, shareholders, employees and the community.”

The profitability of the main retail banks declined in the 2016 reporting year.

Return on equity for the major banks dropped from 15.6 per cent in 2015 to 13.6 per cent, while net interest margins for the major banks fell to a record low of 202 basis points

CBA 1Q Trading Update – Running Hard Under Sail

The Commonwealth Bank (“the Group”) today advised that its unaudited cash earnings for the three months ended 30 September 2016 (“the quarter”) were approximately $2.4 billion. Statutory net profit on an unaudited basis for the same period was also approximately $2.4 billion, with non-cash items treated on a consistent basis to prior periods.

Our take is the CBA ship is running hard under sail, but the seas are far from calm, with funding costs rising, and more capital required to support the mortgage book.

Key outcomes for the quarter are summarised below:

Business Performance:

Operating income growth was slightly below that of FY16, impacted by the low interest rate environment, a strengthening Australian Dollar (AUD) and higher insurance claims. Banking income growth was solid, supported by strong trading income. Group Net Interest Margin was lower in the quarter due to higher funding costs;
Expenses were well managed in a lower growth environment, resulting in positive “jaws” in the quarter, notwithstanding ongoing investment in the business;
Across key markets, volume growth remained either broadly in line with, or ahead of system in home lending, domestic business lending and household deposits. In Wealth Management, Average Assets Under Management (AUM) and Funds Under Administration (FUA) rose by 3 per cent and 2 per cent respectively driven by stronger investment markets and positive net flows. ASB customer advances continued to grow above market in the quarter.

Credit Quality:

The credit quality of the Group’s lending portfolios remained sound, with consumer arrears decreasing in line with seasonal expectations;

Loan Impairment Expense (LIE) was $322 million in the quarter, equating to 18 basis points of Gross Loans and Acceptances, compared to 19 basis points in FY16.

Consumer LIE was higher in the quarter, primarily driven by continued stress in areas of WA and QLD impacted by the mining downturn. Group Troublesome and Impaired Assets were slightly higher at $6.8 billion reflecting ongoing stress in the New Zealand Dairy sector;

Prudent levels of provisioning were maintained, with Total Provisions at $3.8 billion.

Capital, Funding and Liquidity:

The Group’s Basel III Common Equity Tier 1 (CET1) APRA ratio was 9.4 per cent as at 30 September 2016. After allowing for the increase in risk weighting for Australian residential mortgages and the impact of the 2016 final dividend (which included the issuance of shares in respect of the Dividend Reinvestment Plan), the CET1 (APRA) ratio increased by 34 basis points in the quarter, primarily driven by capital generated from earnings. The Group’s Basel III Internationally Comparable CET1 ratio as at 30 September 2016 was 14.3 per cent.

The Group’s Leverage Ratio was 4.8 per cent on an APRA basis and 5.4 per cent on an internationally comparable basis;
Funding and liquidity positions remained strong, with customer deposit funding at 66 per cent and the average tenor of the wholesale funding portfolio at 4.3 years. Liquid assets totalled $135 billion with the Liquidity Coverage Ratio (LCR) standing at 126 per cent. The Group issued $12.5 billion of long term funding in the quarter.