Australian banks can expect a beating next week, no matter how much money they make

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Three of the four major banks report their first half results next week.

And while most analysts expect the headline cash profit numbers will mostly show growth, the banks can expect negative reaction no matter what type of result they bring in.

“They are on a hiding to nothing,” says one industry analyst who didn’t want to be named.

If it’s all good news, the election footing in Canberra will mean more bank bashing from politicians who have worked out that they get few disagreements from voters on this issue.

The banking industry has been subject to several scandals recently including poor financial advice to customers, restricting payouts for disability insurance claims and allegations of rigging the bank bill swap rate.

Labor wants a royal commission into the banks and the Coalition government has given the corporate watchdog ASIC more funding so it can investigate and prosecute wrongdoing.

If the result numbers are really bad, then the market will punish share prices. The banks have already been sold down in a global banking stock rout.

Westpac starts on Monday with its results, followed by the ANZ on Tuesday and the NAB on Thursday.

Analysts expect numbers to be weak but mixed.

The ANZ is restructuring its international and institutional business, and the NAB is reporting after the demerger and float of its UK business.

And the big banks have an exposure of more than $3 billion from a handful of recent high profile corporate collapses.

Steel maker Arrium and electronics retailer Dick Smith are already in administration. Listed law firm Slater and Gordon is holding talks with its lenders after trouble with its UK business.

Others include the Wiggins Island Coal Export Terminal in Queensland, logistics group McAleese and Peabody with its coalmines in Queensland and New South Wales.

The underlying credit quality of the banks is solid but these exposures will require a substantial increase in provisions which is likely to lead to a material rise in bad debt charges.

“We expect the banks to conservatively provide for these high profile exposures upfront, potentially using overlays,” UBS says in a note to clients this week.

“Banks which are perceived to have inadequately provided for these well-known positions are unlikely to be rewarded by the market.”

UBS expects the banks to push through these bad debt charges and keep their dividend streams coming.

“We believe investor expectations for these results are relatively low and, as has been seen through the recent US Banks reporting season, reasonable results can lead to positive share price reactions,” UBS analysts Jonathan Mott, Adam Lee and Rachel Bentvelzen write in a note to clients.

“The banks are also likely to be excused for conservatively providing for single-name (bad debt) exposures provided the rest of the book is clean.”

UBS expects overall results to be weak with EPS (earnings per share) expected to be down 4.1%.

Net interest margins, which improved after the banks lifted home loan interest rates last year without a movement in official cash rates, are expected to be offset by increased funding costs and competition.

Deutsche Bank expects underlying earnings to be solid, between 3% and 8%.

However, however it forecasts bad debt ratios to rise by about 4 basis point because of the big corporate exposures and a weaker resources sector.

“We expect non-resources asset quality to remain resilient, however investors are likely to focus on any commentary the banks can provide on provisioning for single names,” Deutsche Bank says in a note.

Cash profit forecasts:

Westpac
UBS – $3,847 billion, -4.8%.
Deutsche Bank – $4.096 billion, +1.3%.

ANZ
UBS – $3.546 billion, +0.2%.
Deutsche Bank – $3.668 billion, +3.6%

NAB
UBS – $2.955 billion, -9.5%.
Deutsche Bank- $3.325 billion, +1.9%.

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