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Why bank analysts prefer this quality lender over the rest

Investing 101

Morgans have released a summary of the key points from the recent bank reporting season.

Of the banks that reported, Morgans says NAB was in line with consensus expectations, while ANZ and WBC beat consensus earnings expectations. Despite this, Morgans holds NAB as having the strongest 1H22 performance overall. NAB produced the strongest profit growth at 6.5 percent on the pcp and it had the best loan growth of 5 percent.

On rankings, ANZ and NAB are the most preferred with eight buy calls on each. CBA is the least prepared because of its valuation trading on a PE of 19x FY1 earnings. ANZ on 12x is considered the cheapest of the four. The below table summarises the key operational details/drivers from the bank reporting season.  We make the following key observations:

    • NAB and ANZ recorded cash earnings growth of 4% on pcp respectively.
    • WBC’s 1H22 cash earnings were down 12% on pcp compared to NAB’s 8% cash earnings growth, well ahead of ANZ at 3% (we note the 70% sequential cash profit growth for WBC reflects large write downs in 2H21).
    • NAB’s 5% loan growth for 1H22, was well above ANZ and WBC’s performances (3%, 1% respectively).
    • Net Interest Margins – Declined across the board by 7bps-15bps on the sequential quarter respectively, reflecting industry competitive pressures. 
    • WBC saw the biggest cost reduction in 1H22 with costs down 10% on pcp (albeit with revenue also down 8% on pcp).

    Morgans says, overall “banks saw excellent bad debt performances for the half.  ANZ and WBC saw sizeable credit write backs of +A$284 and +A$372m respectively, while NAB had just a -A$2m bad debt charge.  CBA’s credit recovery was +48m for 3Q22. NAB has the strongest CET1 capital ratio at 12.5%, with the other banks in the 11%-11.5% range (CBA 11.1%).”

    Key result take-aways – in brief, Morgans view, “Westpac: A better 1H22 result than expected at both earnings and the dividend.  The earnings beat was driven primarily by a better outcome on costs than expected (expenses -10% on pcp). NAB: Broadly in-line with consensus at NPAT, but 5% above at the dividend.  NAB had the strongest sector performance (cash earnings +4% on pcp and +10% on 2H21), with the only result weakness being a reset of future cost guidance (NAB is now guiding to 2%-3% expense growth this year and is no longer targeting absolute cost reductions by FY23-FY25, on a changed inflation environment).”

    Morgans is generally positive on the banks especially in arising interest rate environment. The wealth manager says, “ANZ: generally, banks are positively inclined towards a rising rate environment. But the reality is that much of that inflation comes first in our costs, then into our revenues, and then eventually, if you’re not managing our portfolio well, it flows into our risk provisions. So, we have to be careful as we think about the rising rate environment because it comes with both positives and negatives.”

    Source: Bloomberg, Morgans

    Valuation metrics – major banks

    Source: Bloomberg, Morgans

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