There is “little to get excited about” in the banks’ results for the first half of 2017, with UBS’ Banking Sector Update calling it a period of “subdued” activity and flat revenue.
“Following a period of anticipation given mortgage repricing, the banks' results were a bit of a fizzer,” said UBS analysts
Jonathan Mott and
Rachel Bentvelzen in the report. All three of the majors that reported during May saw revenue fall.
ANZ’s revenue fell 2.8%, excluding property sales. National Australia Bank (
NAB) was down 0.2% and
Westpac (WBC) was down 0.1%. The Commonwealth Bank of Australia’s revenue rose 3,.4% (excluding the Visa share sales), but growth “slowed sharply” from the third quarter to March this year, according to the report.
“Expenses were the highlight, up 0.5% despite a seasonal jump at NAB,” it added.
Other highlights include:
• A 0.5% increase in expenses despite a seasonal jump at NAB
• A 3.6% growth in NPAT and 3.3% in EPS
• A rise in ROE to 14.2% from 13.9% mainly due to stronger trading revenue
• Capital build was strong with CET1 +40bp to 9.9% as banks ran down unused facilities and optimised models
“Pandora’s Box”
The analysts said they have a negative stance on Australian banks, with 0 Buy, 3 Sell and 4 Neutral ratings.
“We see significant risk from the Bank Levy announced in the Federal Budget (6bp of Liabilities, raising ~$1.55bn p.a. or 5% of NPAT). While we expect banks to pass much of this onto customers, Pandora's Box has been opened.”
They said bank repricing could earn the “wrath” of the government, who may react by increasing the Bank Levy rate. “Future governments could also raise the Bank Levy as an easy source of revenue to fund spending, tax cuts or the deficit, especially as none of the political parties oppose this policy.”
If banks reprice their mortgage books, the analysts warned this could put further pressure on household cash flows “which are already suffering from near record low income growth, higher mortgage payments (as they revert to Principal & Interest from Interest Only loans and absorb recent repricing) and higher power bills.”
“While the implication on the 'animal spirits' in the housing market is difficult to predict, we see substantial risk to the Australian Housing Bubble. Despite the recent pull-back we struggle to see the upside case in owning the banks in the current environment.”
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