Westpac WBC reported 1Q19 earnings on Monday and despite the benefit of mortgage re-pricing pushing net interest margins higher, earnings exhibited no growth compared to the same time last year.
1Q19 cash profit came in at $2bn.
All banks, (excluding ANZ & MQG), are under Algo Engine sell conditions and we see little reason in the short term for these negative trends to reverse.
Our ALGO engine triggered a sell signal for WBC into the ASX close at $27.70.
This “lower high” pattern is referenced to the intraday high of $28.35 posted on September 28th.
WBC will go ex-dividend for 94 cents on Tuesday.
With round 7 of the Royal Commission scheduled to start on November 19th, we remain cautious of the price structures and forward margin growth of the domestic banks.
As such, we see scope for the local banking names to retest the October lows over the near-term.
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.
Our ALGO engine triggered a buy signal for WBC on Monday’s ASX close at $27.76.
This “higher low” price pattern is referenced to the low of $27.24 posted on June 14th.
WBC shares got a lift yesterday after investors reacted positively to the bank’s out of cycle increase of variable rate mortgages.
Effective September 19th, WBC will impose a 14 basis point increase to all standard mortgages, which will lift the rate to 5.38%.
In previous postings, we have cited compressed margins and decreasing loan creation as a potential headwind for the banking sector and consider the recent upside price action as corrective in nature.
We expect the other major banks to follow WBC’s lead and lift variable mortgage rates over the next few days.
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.
WBC’s 1H18 NPAT of $4.25bn was a strong result and beat most analysts expectations.
Margin expansion and strong contributions from markets & treasury income, showed positive trends and helped to deliver total earnings growth of 4%; outperforming both ANZ and NAB.
We highlight the trend across all bank results where bad debt charges are lower than expected. Provisioning is at historical low levels and there is some early stage evidence of trends within 90+ BDD rising.
Investors should use any recovery from current levels in the banks to sell covered call options or to re-balance overweight holdings.
Shares of WBC are trading over 2% higher and have reached a 7-week high of $29.70 in early trade.
WBC announced today that their net profit and cash earnings were 7% and 6% higher than the corresponding six-month period.
However, even though the cash earnings equals $1.25 per share, the bank said that they would hold its dividend at 94 cents per share, fully franked.
We see the next key resistance level at $30.40 and medium-term support near the April 27th low of $27.60.
Local banking stocks have found a slight bid in early trade today. However, we expect more downside price pressure as the Bank Royal Commission proceeds.
So far, we’ve seen evidence of appalling behaviour by Australia’s major banks and financial planners from the past decade, including bribes, forged documents and repeated conflict of interest in insurance products.
It seems that the banks discovered long ago it was highly profitable to sell their customers financial advice and financial products.
If they could charge customers for financial advice, and if that “advice” consisted of purchasing their financial products, then they would enjoy a profitable feedback loop.
This model was called ‘vertical integration”, which is inherently a conflict of interest.
With earning season approaching, we believe there will be some buying interest from longer-term investors.
We will keep a close watch on banking shares and advise which names have met our ALGO price criteria to hold in investor portfolios.
Local banking stocks will be facing higher funding costs as LIBOR rates have surged higher over the last few weeks.
Considering the negative combination of the Royal Commission and lower margins on Mortgage lending, we have been urging caution to investors looking to buy the recent dips in the Big 5 banking names.
As illustrated in the chart below, the cost of local bank funding has posted the sharpest monthly rise in over 8 years.
As such, we don’t believe the local bank shares have found sustainable price support levels yet.
Phone in for more details on trading the local banking stocks on a cash basis and on the SAXO Go CFD platform
Our Algo Engine generated a buy signal in Westpac on the recent “higher low” chart formation.
Place a stop-loss on a break back below $30.50 with an upside target $33.00