Insights for Investors by Investors

Banks are set to report, four things to watch

1-CBA-01

With bank reporting season underway, it’s important to know what to look for when assessing the big banks. The days of looking solely at dividend payout ratio and price/earnings ratio are long gone. We live in a global world, with cross-border comparisons more important than ever.

The first cab off the rank every year is CBA. It is the first bank to post its full-year results, and it sets the tone for the other three, being ANZ, NAB and Westpac, CBA releases its-half year results in February and full-year results in August. The three other big banks have a 30 September year-end and report their results in May and November. Here are the dates:


CBA have already posted its result. The bank reported a six-month cash profit of $3.89 billion and a statutory net profit after tax of $4.88 billion, 21 per cent lower than the prior comparative period. The interim dividend came in at $1.50 per share, up from the 98 cents final dividend announced in August, but lower than last year’s interim of $2.00 a share. The net interest margin pulled back to 2.01% due to higher liquid balances (unused cash) and the impact of the lower rates. Was this a good or bad result for CBA?

There are four key areas that can applied together to determine the health of a bank and whether it is a Buy or Sell.

  1. Cash Profit  

When a company reports its profit result, there is a key question: Did it match expectations? Unlike a normal company that reports its statutory profit and net profit after tax, a bank will also report its cash profit. This is a measure used by Australian banks to remove from statutory profit the “noise” of non-business-as-usual items, such as gains/losses from any sales or acquisition, which have been significant and negative in recent years as they exited everything from wealth management to investing. Cash profit is a useful tool to allow the market to benchmark the ‘true’ underlying performance. Comparing the cash profit to broker expectations will determine whether the result met, beat or missed expectations. The above CBA example was a “beat.” The bank posted a half-year cash profit of $3.89 billion, which was slightly higher than the analysts’ consensus expectation of $3.76 billion, hence the strong share price performance since.

2. Payout ratio = dividends per share (DPS)/earnings per share (EPS).

Banks are known for their high yields and defensive characteristics. Last year, dividends were a casualty of the coronavirus pandemic. APRA also provided regulatory guidance that forced bank dividend payout ratios to not exceed 50% of earnings. This was withdrawn in December 2020 but has yet to feed through to investors. This reporting season, all eyes will be focused on the payout ratio and commentary around future dividends. The big banks usually pay out roughly 80% in dividends to shareholders; last year, however, they paid out roughly 30% during COVID times.

With the worst of the headwinds from COVID-19 now hopefully past us, there is earnings and capital upside that could lead to dividend upside surprise this earnings season. However, after years of paying out nearly all their profits as dividends and failing to invest in themselves, there is a risk that management continues to hoard capital rather than pay it all out. CBA’s dividend yield over the last five years has been 5.41% while the payout ratio is 81.09%.

3. Net Interest Margin = (Interest Income – Interest Expense) / Total Assets

According to KPMG, “net interest income makes up circa 75% of the major banks’ total annual income, and mortgages make up 56%69% of their lending balances. As a result, the majors’ results are highly sensitive to the mortgage market (a recent estimate was that every 5 basis-points reduction in mortgage NIM results in a 1%2% reduction in cash earnings for the majors).” Put simply, net interest margin is the ‘fee’ that the banks earn by facilitating term deposits, bank accounts and loans. It is the net interest earned on their deposits versus loans. Cash earnings of the four banks was $26.9 billion in FY19 with a NIM of 1.94%, which was down 9 bps due to the intense competition from smaller ADIs (approved deposit-taking institutions) and non-banks, lower margin products and interest rate cuts. CBA posted a NIM of 2.01%, versus 2.11% last year.

In the table below, the NIM for the big four banks is highlighted for last May’s 2020 result.


Last reporting season saw banks post NIM of around 1.7%2.1%. The past COVID year has been a difficult one for the banks, with bad debts a concern in addition to higher-than-expected costs. However a recent property boom is a positive for mortgage volumes, which, when combined with the RBA’s near-zero-rate loan funding, NIMs may not be as bad as first thought, as funding costs improve.

4. Price to book ratio = share price / book value per share

Investors tend to use the P/E ratio, which is the share price divided by earnings per share (EPS), to assess traditional stocks like manufacturers and miners. Bank earnings, however, can be volatile from one quarter to the next because of unpredictable banking operations. By using book value per share, the valuation is referenced to a bank’s book value, which has less ongoing volatility. The book value per share is a company’s book value for every common share outstanding. The book value is the difference between total assets and liabilities.

  • A profit-to-book (P/B) greater than 1 means the stock is being valued at a premium in the market to equity book value.
  • A P/B less than 1 means the stock is being valued at a discount to equity book value.

The P/B ratio for CBA is 2.168 for April 28, 2021 with the average around 2.16x. This is among the highest in the world, reflecting the CBA’s incredibly strong market position and the legislated oligopoly enjoyed by the Australian banks.  The current P/B ratio of the four major Australian banks is looking a little high. Here are the averages ANZ 1.94x, WBC 2.04x, NAB 1.82x.

And there you have it. Armed with these four metrics, analysing the three remaining big banks and their results should be a whole lot easier. Good luck.

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