Nicholas Grove: I'm Nick Grove for Morningstar and today I'm joined by David Ellis, who is here to discuss the upcoming first-half earnings results from three of Australia's big four banks next week.
David, thanks for your time today.
David Ellis: Pleasure, Nick. Thank you.
Grove: First of all, David, Westpac kicks off the mini earnings season next week on Monday with ANZ following on Tuesday and NAB on Thursday. Now, with the upcoming federal election and regulatory uncertainty and talk of a Royal Commission by Labor and just all this generally increased media scrutiny, what is it that investors should be focusing on?
Ellis: Sure. Well, Nick, obviously, they should be focusing on the profitability of the banks and the expectation of future profitability and that flows through to returns on equity which will be closely scrutinised and of course, dividends. There has been a lot of publicity and a lot of concern and uncertainty about whether the major bank dividends are sustainable, which we believe they are. So we will be focusing on headline revenue growth, cost control, bad debts will also of course feature very heavily, but most importantly, we'll be looking at bottom-line profits and dividends.
Grove: So, David, can investors expect a decent-sized dividend from the big three next week?
Ellis: Of course. Based on our view, our opinion, we believe that the three banks reporting next week will probably hold their dividends flat on last year. We might see--it's possible that Westpac will increase their dividend $0.01 per share. They tend to have a slightly progressive style of dividend pay. So, whilst we expect a $0.94 dividend, it's possible it will be $0.95, $0.01 higher than the final dividend for 2015. National Australia Bank, we expect flat dividend, $0.99, and that's been flat for the last 4.5 years.
ANZ is an interesting one. We're expecting a full-year cut in dividends for ANZ. But looking at the half yearly results, it's quite possible that they will hold their dividend flat on first half 2015, so the 2015 interim dividend. And to do that they will be increasing their payout ratio and the same with Westpac and the same with NAB. So, the payout ratios we expect will be higher. We're not forecasting those higher payout ratios to stay at these higher levels indefinitely. And it's really a reflection of the large amounts of capital that were issued last year. So, earnings per share will probably be modestly negative. So, earnings per share will be down on a year ago for the three banks reporting. But as I said a moment ago, I expect dividends to be flat as a result of temporarily higher dividend payout ratios. So, overall, yeah, a good outcome I think for bank shareholders looking at the major bank dividends.
Grove: Are your wide moat ratings on the big banks going to remain intact?
Ellis: There's absolutely no reason to consider that the four major banks' wide moats are under threat irrespective of the political and media focus on them. I think this focus on the major banks really just clearly demonstrates that they have very strong business models, they have high levels of profitability and high dividend payout ratios. And keep in mind that virtually everyone in Australia directly or indirectly through their super funds have an interest in the profitability of the major banks. I think that particularly the political focus on them has been overdone.
Grove: Finally, David, Macquarie reports its full-year earnings next Friday. Now, as you've said before, Macquarie's earnings guidance can be a little vague. But what sort of performance are you expecting out of the bank and what are going to be the key drivers of its earnings?
Ellis: Well, it will be a strong result. They have guided for an increase on 2015 for their full-year result. How strong? We don't know yet of course, because as you've pointed out, the guidance has been and has always been vague, to say the least. But we expect a good result, particularly coming from their asset management businesses and their corporate and asset finance businesses. So, those two combined contribute close to 60 per cent of group earnings, divisional contribution earnings. So, they will be the two big profit drivers. The market-facing businesses will be closely watched. We're looking for improvement in two of those three--two of the three market-facing businesses. But in absolute terms, it's really the annuity-style businesses, so Macquarie has three of those--the asset management business, the corporate and asset finance business, and their banking business--they will be the key drivers of profitability. A key outcome from the result will be what's the outlook for the 2017 financial year, which we will be closely monitoring.
Grove: David, thanks very much for your time today.
Ellis: It's a pleasure, Nick. Thank you.
Grove: I'm Nick Grove for Morningstar. Thanks for watching.