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Nathan Zaia: I think the bank results were decent overall. So, we have modest credit growth, margins still under a little bit of pressure, but bad debts still very low. So, all in all, it's resulting in flattish to slightly lower earnings. If you look at the second half of last year, comparing to the first half of the year prior, they were very, very strong results. And we all know that the upside from interest rate increases has continually been competed away.

But I think the two main key takeaways, I would say, that the pressure on margins is starting to moderate. So, we are seeing banks when it comes to discounting on new loans or even discounts to existing customers, they're not as aggressive as they had been. I mean, we've got to a point where returns in mortgages and consumer space, they've gotten to a point where it doesn't make sense to compete aggressively or as aggressively on price anymore. And that's something we expected to start to play out. So, we are seeing some signs of that.

The second one is on loan losses. So, we're continually being surprised that how low bad debts remain. And there are signs of rising credit stress. So, we've seen repayments go up quite a lot for some households. So, there is more people falling behind. But strong house prices, low unemployment, and there are equity buffers that have been built up, which is resulting in the actual losses remaining very, very low.

Bad debts as a percentage of loans, it's been really low for some time now. And we've been expecting it to revert back more to historical averages. So, we do think as you get into a period where unemployment is rising from current lows, maybe you don't get as strong house price appreciation, you will see those stresses flow through to bad debts. So, we are expecting it to normalize. There's obviously a risk that it overshoots, but we think it's – at the moment, it doesn't look extremely likely. But if you look at the banks' positions to be able to handle that, they've got huge profits, so you lower the dividend payout ratio and you can cover huge losses. They're sitting on large loan loss provisions as well. So, the banks make assumptions around in different economic environments, what will house prices do, what will unemployment rate do, what is their exposure, they're pretty conservative on those assumptions and they're holding excesses to that. So, there's a bit of a buffer built up there, and then you go on to their capital position. So, there's a lot of buffers in place to handle higher bad debts if it does eventuate as well.

The major banks all announced buybacks with their half-year results, $4.5 billion in total. And look, that basically reflects the strong capital positions that they do have. And I think management being a little bit more comfortable, the loan losses are going to be manageable in medium term, I should say. And if you look beyond the current round we've just had, the banks still have quite a lot of surplus capital. So once these buybacks are complete, we estimate across the banks, they'll still have around $6 billion of surplus capital. So, we think over the next 6 to 12 months, there's probably more of these capital management initiatives to flow through. So big dollar amounts, but not huge in the scheme of things anyway.

And when it comes to dividends, that capital position is helping the banks to have flexibility as well. So, we're forecasting earnings per share across the majors to be down about 5% in 2024, but we think dividends hold flat and even growing modestly. So, there is room to increase the payout ratio supported by that strong capital position.

We think in the major banks, ANZ and Westpac are still modestly undervalued, whereas NAB and CBA are a little overvalued. So, we're expecting margins to improve modestly over the medium term, mid-single-digit loan growth, bad debts normalizing back to around historical averages. You should get mid-single-digit EPS and DPS growth in that sort of environment. So, we think ANZ and Westpac probably are trading at a discount given concerns around their cost position. So, they are a little bit higher up in terms of costs within the banks, but we think that's an opportunity for both banks to be able to strip out costs, become more efficient. There's obviously risks around that in terms of execution, does it disrupt your business operations, does it cost more to achieve, do you ever achieve it? So, I think the market often takes a bit of a wait-and-see approach. But we definitely think there's more opportunity in those two names.

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