NEWS + VIEWS – 17/5/2024
Markets
Most markets reacted to economic data suggesting that inflation might be easing, albeit slower than previously expected.
Wednesday night’s US benign inflation data kicked off a rally in US shares. Investors are betting on interest rate cuts occurring and company profits rising strongly. One would have thought that one or the other could happen, not both.
Domestically, markets followed the US, particularly as the headline unemployment rate rose to 4.1%. However, the rise included a 38,500 increase in employment that was ‘cancelled’ out by more people entering or re-entering the workforce. A cut in interest rates would require further employment weakness, particularly in view of this week’s big spending budget.
Terms of trade and budgets
As the Federal Budget has been ‘done to death’ over the past few days we will not cover it again. Suffice to say that it is likely to add to inflation and probably reduce productivity.
The chart below should give Federal and State Treasurers grounds for concern, but it probably won’t. It shows how elevated Australia’s terms of trade have been over twenty years and, in particular, over the past four years.
Terms of Trade (TOT) is a measure of a country’s export prices relative to its import prices. Mineral and energy prices have been underpinning Australia’s economic performance and governments have been spending all of this windfall plus some.
TOT will turn down at some stage. Instead of the deficits Federal and State governments are currently running, we should be delivering strong surpluses.
The major banks
Three of the four major banks reported their half year results over the past two weeks with Commonwealth Bank (CBA) providing a quarterly trading update.
Cash profit was down with NAB and Westpac (WBC) tumbling more than -10%, ANZ -7% and CBA -5%. This was expected by the banks and analysts as previous results were positively impacted by rising interest rates.
All the banks pointed to increased competition in mortgage markets with margins on broker-initiated mortgages very thin. WBC CEO Peter King stated however that competition was ‘easing’.
Net interest margins (NIM) fell across each of the banks; NAB 1.72% (previously 1.7%), WBC 1.89% (1.96%) and ANZ 1.63% (1.65%). This reflects the lower margins on mortgage lending.
NAB’s business banking has for many years outperformed those of the other banks. This is proving to be a strong positive as personal banking margins come under pressure. Its business bank lending grew 9% from the previous half.
Provisioning for bad debts showed an ‘uptick’ for each bank although they are still at low levels.
Balance sheets for the banks remain very strong. NAB and WBC’s Tier 1 Capital ratios are slightly over 12% and ANZ’s a very high 13.5%. The additional capital at ANZ is in preparation for their impending takeover of Suncorp (subject to regulatory approval). CBA has the lowest at 11.9% but bear in mind that APRA’s minimum ration is only 10.25%. The extra 1.65% equates to around $7.7 billion of ‘excess’ capital for CBA.
Drawing on their strong balance sheets, NAB, WBC and ANZ opted to extend their on-market buybacks.
WBC increased its dividend by $0.03 to $0.75 per share and threw in a special $0.15 dividend for good measure. On the other hand, ANZ reduced its dividend from $0.94 to $0.83 while NAB kept its dividend at $0.84.
The banks are in a strong position and the dreaded ‘mortgage cliff’ where borrowers struggle to meet increased interest payments has failed to materialise. Falling NIMs will be the banks’ key concern when or if interest rates fall. While unemployment remains low, balance sheets won’t be under pressure and dividends should stay healthy.
Macquarie Group (MQG) profit falls
MQG’s full year profit fell -32% to $3.55 billion compared to the previous year.
MQG has a local banking licence but the majority of its operations centre around investment banking activities.
The unexpected ‘disappointment’ was bank’s failure to sell renewable energy assets. CEO Shemara Wikramanayake stated that assets would only be sold when ‘best returns’ were available. MQG develops then on-sells assets.
The other weakness was the halving of earnings on its commodities and markets business to $3.2 billion.
Local banking business profit rose 3% as MQG are upping the ante on local banking. Its major focus has been in the mortgage market, and it is now aiming to use those capabilities for business banking. Business banking lending was up 22% for the past year although it was from a low base.
MQG management has a strong track record. Disappointments have been temporary as the company has the ability to quickly pivot or refocus as market trends evolve.
Gerard O’Shaughnessy
P 0423 771 330
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