A key driver of the Commonwealth Bank’s better-than-its-peers earnings growth and share price performance in recent years has been the positive difference between revenue Vs expense growth, or the jaws.
However, Morgan Stanley now expects flat jaws for the 2015 financial year before a recovery in 2016, as this chart of the jaws shows:
The Commonwealth Bank posted a flat March quarter cash profit of $2.2 billion, with a rise in expenses and pressure on loan margins.
Morgan Stanley forecasts profit growth will slow to about 5% in the 2015 financial year from 12% in 2014.
The Commonwealth Bank’s expense growth has increased to 6.5% due to the impact of “growing regulatory, compliance and remediation costs”.
And the Commonwealth’s margins have dropped 4 basis points due to ongoing “competitive pressures”.
However, Morgan Stanley believes that bank will continue to target, and deliver, with a recovery in revenue growth to 6.5% in 2016 against expense growth of about 5%.
Morgan Stanley has a negative stance on the outlook for major Australian bank share prices over the next 12 months.
“We see a combination of macro-economic challenges, increasing competition in the oligopoly, bottom-of-the-cycle loan losses, materially higher capital ratios, flat dividends and stretched trading multiples,” Morgan Stanley says in a note to clients.
However, Morgan Stanley is not completely bearish on banks.
It expects the regulator, APRA, will allow the major banks a transition period to meet new capital requirements.