Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Investors check big-four exposure as banking headwinds strengthen
Rising interest rates and other changing economic conditions are creating headwinds for Australian banks after several months of gains, prompting investors to rethink their exposure to a key equities sector and particularly the big four.
July trading data from Selfwealth’s trading community of 129,000-plus members shows that as the ASX broke out of its sluggish start to the new financial year, investors withdrew capital out of the major banks to lock in profits amid rising share prices across the sector.
Commonwealth Bank of Australia (CBA) was the most popular stock in July among the Selfwealth trading community, and Westpac was fourth most popular – putting in in the same top five with Neuren Pharmaceuticals, BHP and CSL as last month’s report.
National Australia Bank (NAB) and ANZ were the sixth and seventh most popular, switching positions from June as the collective value of ANZ holdings fell by 0.7 per cent despite ANZ recording a larger share price gain (8.6 per cent) than NAB (7.8 per cent) over the month.
The ANZ activity reflected profit-taking amid a recent share price rally ahead of the Australian Competition and Consumer Commission (ACCC)’s decision on ANZ’s proposed acquisition of Suncorp Bank. (ANZ shares on Tuesday had fallen about 1.75 per cent since the ACCC on Friday refused to grant authorisation to the takeover.)
“Providing further context to ANZ’s fall into seventh spot among the most held stocks, more than 75 per cent of money flow in the bank stock last month was driven by selling activity,” Selfwealth brand and content lead Robert Marfell said in the July trading report. “Not only did sellers outnumber buyers in terms of trades placed, but the value of those sell orders dominated the capital that buyers were prepared to put into the stock.”
However, he noted that other banks also registered net holdings outflows “masked by rising share prices” in July.
Among the top 20 securities traded by value in July, Westpac was the best-traded bank and fourth-most-traded ASX stock, with a 46.3 per cent buy-sell ratio. CBA, with a 44.1 per cent ratio, was next, coming in 10th overall – just behind Macquarie Group. ANZ was 13th-most-traded by volume (24.3 per cent buy-sell ratio).
The fact that the buy-sell ratio was below 50 per cent for each of the big four shows some of the momentum may be leaving the banking sector after a strong two-month run, Marfell said. About six in 10 trades of big-four banks were sell orders.
More headwinds expected
According to Martin Currie chief investment officer Reece Birtles, the big four hold significant importance in Australian equity portfolios, whether focussed on total return or income, due to their size and yield. Banks made up 19 per cent of the S&P/ASX 200 Index market cap as of the end of June, as well as 28 per cent of the broker consensus forecasts for franked dividends.
Martin Currie cited “widespread expectations of a slowing domestic economy and much-publicised concerns over the capacity of borrowers to navigate the transition from low fixed-rate mortgages” in adjusting its forward expectations for each of the big four’s relative valuations and reassessing their ability to pay dividends.
Birtles says banks’ earnings risks are skewed to the downside, with CBA in particular appearing overvalued. Nonetheless, Martin Currie’s proprietary analysis shows dividends for the big four will likely remain attractive and largely meet broker consensus forecasts for franked dividends for the next year.
“For portfolios focussed on total return, we believe that inferior [net interest margins] and rising potential loan losses support underweighting the banks sector versus the S&P/ASX 200 Index,” Birtles says. As funding costs normalise at higher levels, banks will feel the pinch of mortgage discounts.
“With deposit margins now a headwind, the only realistic method for banks to repair their net interest margins will be by limiting the pass-on benefits to customers when a rate-cutting cycle commences,” he says. “Lower NIMs will lead to reduced revenues, which we believe will be even lower than the consensus estimates for the next three to five years. This, in turn, will result in a higher-than-expected cash earnings shortfall compared to our earlier expectations and consensus.”
Birtles also thinks lower savings levels will likely translate to reduced consumer demand for credit, which could prompt a “sharp correction” in housing credit supply. He notes that interest payments are set to rise 119 per cent in fiscal 2023 followed by another 33 per cent increase in 2024.
“The fundamentals around lending policies, mortgage rates, term deposit rates and living costs all point to a higher risk of substantial declines in credit availability, translating to lower prices,” Birtles says, “further contributing to the revenue squeeze for banks”.
