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How Australia's big 4 will fare this year

Glenn Freeman  |  09 Jan 2018Text size  Decrease  Increase  |  
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For all the noise building around the Federal Government's Royal Commission into Banks and Financial Services, Morningstar's senior banks analyst David Ellis reminds investors of a few home truths.

When the Royal Commission was announced in December last year, the share prices of Australia's four major banks fell initially, with Commonwealth Bank of Australia (ASX: CBA) leading the way down to close below $79 a share on 4 December, 2017.

But a day later, the banks' share prices had actually recovered," says Morningstar's David Ellis.

"I don't consider the royal commission, or potential outcomes from the royal commission, will have any impact on the underlying fundamentals of the four major banks.

"And in particular, I don't see the wide economic moats being diminished in any shape or form. I see the banks' strong competitive advantages retained," Ellis says.

He believes the outcomes that are eventually announced when the royal commission reports back, with a final report due by February 2019, will be "taken in stride" by the banks.

He also reminds investors that "this is not a royal commission into the four major banks".

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"This is a royal commission into the Australian financial services sector, obviously including the four major banks, but it includes banks big and small, it includes insurance companies, it includes superannuation funds excluding self-managed super funds and it includes basically potentially any entity that has an Australian financial services license. So, it's quite broad in that respect," he says.

He also highlights the "quite narrow" terms of reference of the royal commission, which will focus on past misconduct.

"Now, I think that's a good outcome for the major banks because most of the previous issues, allegations of misconduct have already been dealt with or are in the process of being dealt with. So, this announcement of royal commission is really more politics than good policy."

Commonwealth Bank

Australia's largest bank, Commonwealth Bank (ASX: CBA)  faced a number of challenges in 2017, largely around the Federal Court proceedings initiated by AUSTRAC in August. This also culminated in the announcement incumbent chief executive officer, Ian Narev would retire before the end of fiscal 2018.

"Despite increasing headwinds, we maintain our fiscal 2018 cash profit forecast of $10.3 billion and our fully franked dividend $4.42 per share," says Ellis.

Though Commonwealth Bank has "a history of broadly positive dealings with regulators and law enforcement agencies, the bank has failed to comply with certain specific anti-money laundering and counter terrorism financing laws and is accountable for these failing".

Maintaining his positive view on the banks, Ellis forecasts average annual earnings per share growth of 2.2 per cent over the next five years.

Its wide moat rating also remains in place, as it does for the other major Australian banks Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

"The Royal Commission will go some way to ending political attacks on the crucial banking sector, a sector underpinning Australia’s economy.

"Importantly, the Commission is not examining the four major banks in isolation. Longer term, the Commission will enable the banks to rebuild reputations, consumer confidence and trust, three key requirements necessary for Australia’s world class financial system," Ellis says.

Westpac Bank

With a strategy anchored in conservatively managing risk across all business areas, Westpac pursues a mutlibrand, customer-focused approach that "aims to capture an increasing share of business from its Australian and New Zealand banking and wealth management customer base".

Ellis says the most prominent concern among investors--a fall in the Australian housing market--is mitigated by a combination of factors, including tight underwriting standards and low loan-to-valuation ratios.

"Still, our net opinion and outlook remain strongly positive. Operational discipline, high-quality loan assets, and a diversified funding base provide a good platform to leverage market share gains achieved during a global financial crisis," Ellis says.

National Australia Bank

Australia's biggest business bank, National Australia Bank, offering a full range of banking and financial services to the consumer, small business and corporate sectors, including significant operations in New Zealand. 

Morningstar's fair value estimate for the bank was increased in November, to $32 a share from $31, "reflecting financial year rollover and a better longer-term outlook".

ANZ Bank

This third-largest of Australia's four major banks, ANZ operates in 32 markets globally, though is de-emphasising its "super-regional" strategy, which had been about trade and investment flow between Asia-Pacific countries, Australia and New Zealand. 

"We thought the super-regional strategy would, over time, be successful, but investors have not been patient, and returns have disappointed.

"Progress to date has been good but not good enough. We have always called out the higher risks of the growth strategy, and it appears the experimental nature of the super-regional concept has caught up with reality," Ellis says.

However, Morningstar maintains its modest earnings growth and higher capital market assumptions, having increased its FVE for the bank in the third-quarter of 2017.

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Glenn Freeman is Morningstar's senior editor.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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