Australia’s banks, much loved by retail and institutional investors alike for their quality and seemingly ever increasing dividends, have returned little in the last 12 months in terms of capital gains.
The ASX bank index is today, the last trading day of the financial year, down 0.3% for the past 12 months, shaking the blue-chip status of the banks, at least on share price rises.
Earlier this year there was a spectacular rally in the sector that followed a surprise interest rate cut in February. But the banks were soon to enter official correction territory.
The falls followed a series of uninspiring profit results and negative market forces including APRA-inspired stricter lending for investment properties and expected bigger capital requirements on the horizon, all of which drag on bank margins.
The Commonwealth Bank posted a flat March quarter cash profit of $2.2 billion with a rise in expenses and pressure on loan margins.
This was on top of the second biggest bank, Westpac, posting a below expectation first half cash profit of $3.778 billion. Market analysts had expected $3.88 billion from Australia’s second largest bank.
For investors, the banking gloss has dulled. As of today the Commonwealth has gained just 3.6% in its share price over 12 months. In January, there was talk of the Commonwealth becoming Australia’s first $100 stock. Today it is trading at $84.93.
Westpac has lost 6.3% (today’s price 32.09) and the ANZ 4.6% ($32.26). The NAB ($33.23) is up 1.9%.
All are well below inflation of 2.2%. In effect, the shares are all worth less on the market today than they were a year ago.
This chart shows the share price journey for the major banks:
And there’s no big growth spurt ahead for the banks. According to CLSA analysts, credit growth is likely to stay subdued, meaning slowing growth in lending business. “The recent changes to serviceability, investor lending and home lending by APRA will be something to watch for,” says CLSA.
Lower dividends are partly due to building capital reserves before expected regulatory moves to ensure the banks hold more cash in reserve.
Morgan Stanley, in a note to clients last week, said it believed the earnings per share upgrade journey for the Commonwealth Bank was over.
However, it sees some some flexibility to deal with profit margins and capital headwinds facing the banks because it has a favourable business mix and a low risk profile.
Westpac is stretched, according to Morgan Stanley. The slowing retail bank momentum is a block to dividend growth.
And the ANZ is more vulnerable than other majors to higher capital requirements, says Morgan Stanley.
The NAB is in the middle of a strategy to offload its underperforming UK business by raising $5.5 billion and floating off the Clydesdale Bank. Banking analysts expect NAB to emerge a better but smaller business.