NEWS + VIEWS – 15/11/2024

MARKETS                         

US markets rose strongly on the back of Trump’s presidential election win and his proposed policies around deregulation and tax cuts. Interestingly, bond markets stabilised following an upward pre-election spike. Perhaps the ‘bond vigilantes’ are expecting a more moderate approach to US tariff hikes than announced in the run up to the election. Post election comments from Trump could possibly support that view.

Typically, US presidential elections are followed by a positive trend on US share markets, after some volatility leading up to an election (see chart below).

Source: Coppo Report

Domestically, financials, technology and cyclical industrials had a good week. Resources were subdued, probably on the basis that a spike in US tariffs on China would be a negative. Companies that may gain from the pro-growth US policies include health stocks operating in the US such as CSL, ResMed (RMD) and Cochlear (COH), as well as housing companies with significant US activities such as James Hardie (JHX) and Reece (REH). Insurers may benefit if bonds deliver higher returns.

Markets expect interest rates in Australia to start coming down between early and mid 2025. The Reserve Bank of Australia (RBA) is in the mid-2025 ‘camp’ and seems to be in no hurry to reduce interest rates. RBA Governor Michelle Bullock points to ‘still too tight’ labour markets and persistent inflation (although moderating). High government spending is the key culprit.

BANK PROFITS WEAKER AS EXPECTED

ANZ, NAB and Westpac (WBC) reported their full year results over the past two weeks, the key themes being weaker cash profits, difficult consumer banking environment but maintenance of strong balance sheets. Results were pretty much in line with analyst expectations.

NAB focussed on a jump in arrears of total lending to 1.39%, which reflects the higher interest rates for longer imposed by the RBA. CEO Andrew Irvine suggested that current conditions will be the toughest part of this economic cycle and pointed to construction, agribusiness and discretionary spending sectors as a focus of difficulties.

Consumer bank lending fell significantly but NAB has the best business banking franchise and lending rose 8%. It had an -8% fall in cash profits to $7.1 billion, in line with expectations. The important net interest margin was down 0.03% to 1.71% and the dividend was increased by $0.01 to $0.85 per share.

WBC’s cash profit was $6.99 billion for the full year (down -3%) as costs jumped 7%. Cost increases were in no small part due to WBC’s major technology initiative ‘Project Unite’ that aims to consolidate the bank’s major IT systems.

CEO Peter King also pointed to a difficult consumer banking environment with business banking delivering a much more positive result.

ANZ’s CEO Shayne Elliott echoed his counterparts and portrayed ANZ’s results as ‘strong’ despite an -8% fall in cash profit, driven by revenue -2% lower, expenses 4% higher along with higher arrears. Elliot put the results in the context of a very competitive market for home loans and deposits, and weaker consumer demand for loans due to cost of living pressures on households and small business.

Elliot highlighted ANZ’s impaired loss rate of just 0.18% of total loans, much less than the other banks. Also on a positive note, he suggested that arrears may have passed their peak due to Stage 3 tax cuts and borrowers repairing their balance sheets.  

ANZ’s acquisition of Suncorp’s banking division is a game changer if it can be successfully integrated. Elliot pointed to solid customer, deposit and lending growth in Suncorp. While Suncorp banking is still making losses, costs should drop very significantly as it is absorbed into ANZ’s infrastructure.

Finally, ANZ is yet to be clear of regulatory issues that will be dragging on management.

Overall, the banks have become simpler businesses after exiting problematic forays into wealth management and insurance. Cash flows have become more predictable as have dividends. We are seeing slightly lower returns to shareholders as competition is placing pressure on margins. The key focus for management is in the ‘hard yards’ of continuous improvement in their processes particularly through significant IT spends.

Gerard O’Shaughnessy
P 0423 771 330

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