Banks

Australia and New Zealand Banking Group are the first of the big four banks to report annual profits. There was not much to like in the result, Net Interest Margin pressure along with headwinds on cost control, means the outlook was downbeat.

Macquarie Group’s first-half result is due today and it has guided the 2019-20 profit will be “slightly down” on 2018-19.

The market is certain of a dividend cut at Westpac, which reports November 4.

UBS has warned the second-half of 2018-19 will be remembered as the “high watermark” for the sector, ” as the outlook deteriorates in an ultra-low rate environment.

We prefer the short side of CBA.

 

 

ANZ – Algo Buy Signal

Australia and New Zealand Banking Group is under Algo Engine buy conditions and is a current holding in our ASX 100 model portfolio.

We see support at $26 and a push higher towards $28.50, will provide an opportunity to sell covered call options to enhance the income return.

ANZ goes ex-div, $0.80 on the 14th of May. An August $29.50 call option will add a further $0.50 per share of income.

For more detail on the call option strategy, please call our office on 1300 614 002.

ANZ – Algo Buy Signal

Australia and New Zealand Banking Group is under Algo Engine buy conditions and is a current holding in our ASX 100 model portfolio.

We see support at $26 and a push higher towards $27, will provide an opportunity to sell covered call options to enhance the income return.

ANZ goes ex-div, $0.80 on the 14th of May. An August $27 call option will add a further $0.60 per share of income.

For more detail on the call option strategy, please call our office on 1300 614 002.

ANZ, NAB & Bank ETF Continue To Probe Lower

ANZ is expected to report its FY18 result on 31 October.

The share price has now broken the June low support area and looks vulnerable to more downside pressure.

NAB is scheduled to report its FY18 result on the 1st of November. The next downside target is near the $24.00 area.

Vaneck Vestors Australian Bank ETF has been under ALGO Engine sell conditions since early July. The sell-off so far represents a 20% correction.

 

Australian Banks – Sell Signals Remain Dominant

Our Algo Engine triggered sell signals across the domestic banking names back in June.

Since then, on average, the group has sold off approximately 15% and on a 2-year basis, the sector is now down more than 30%.

ANZ announced this week, that its 2H18 cash earnings will be adversely impacted by $711m of after-tax charges related to legal costs and customer remediation from the Royal Commission.

ANZ releases their full-year NPAT on October 31st.

A second sector risk yet to play-out, is the potential for deteriorating credit quality. This risk has been exacerbated over recent years by “add backs”, where short term earnings are improved through lowering the provisions for bad loans.

Looking ahead, CBA chief Matt Comyn will face the royal commission on Thursday morning, followed by WBC’s Brian Hartzer Thursday afternoon and ANZ’s Shayne Elliott on Friday.

 

Higher Rates Won’t Help The Local Banks

It’s a long held belief among investors that rising interest rates are good for Australian banks in terms of enhancing their earnings.

But this is not necessarily true in the current financial environment.

Banks make money on widening interest rate and credit spreads; simply, the difference between their cost of money and the return on the loans they make to their customers.

For example, last week the ANZ and CBA increased their variable rate mortgages by 16 and 15 basis points, respectfully.

The banks have cited the sustained rise in wholesale funding costs as the reason for lifting rates even though the RBA has kept official lending rates unchanged.

On a valuation basis, we’re cautious of how the repricing of variable rate mortgages will offset the headwinds of higher funding and materially add to earnings growth or an expansion of loan creation.

Further, it’s likely that the local banks will face increased regulatory expenses from the royal commission, including tighter underwriting standards and disclosures of fees.

On balance, we see scope for the share prices of the domestic banks to test the lows posted in June before sustaining any protracted rally higher.

CBA

ANZ

 

 

 

Banks Brace For Round 5 Of The Royal Commission

The Big four banks will be in the spotlight this week as the Banking Royal Commission commences round five today in Sydney.

The main topic for this round of examination will be the fees, charges and weak performance of bank-managed superannuation funds.

One Melbourne-based think tank has estimated that excessive fees and poor performance can cost superannuation investors up to $12 billion per year.

Australia’s largest superannuation provider, AMP, felt the wrath of the Royal commission during the last round of testimony, which saw their share price drop over 30% and the sacking of its chairman, CEO and three other directors.

The chart below illustrates the performance of AMP’s share price relative to the other Big 4 banks.

We don’t have ALGO buy signals for any of the domestic banks and we’re not holding any banking names in our ASX Top 100 portfolio. However, we will look for signals as the share prices approach the June lows.

 

 

 

Increased Funding Costs Limit Upside For Local Banks

The domestic banks have rebounded significantly over the last two weeks with ANZ and CBA both rising over 10% from their lows in early June.

However, this optimism may be short lived as some of the world’s most “Systemically Important Financial Institutions” (SIFI Index) have been trading sharply lower over the last three months.

This banking index includes JP Morgan, Barclay’s and Commerzbank; banks that provide funding to domestic banks in Australia.

Aussie banks are heavily depended on USD-funding from these banks (and others) and will likely feel the pinch on earnings as US rates trend higher and USD liquidity becomes more expensive.

We have been cautious of the local banks and suggest investors look to use this recent rally to off-load long exposure in the banking sector.

SIFI Index

CBA

ANZ