August 2020 reporting: Icy and bittersweet with a twist
COVID-19 bitterness aside, the majors’ underlying performance was sweetened with higher other income (higher trading and markets income due to strong flows, volatility and reversal of MTM losses, and better general insurance outcomes from lower claims in CBA and WBC) and broadly stable to lower operating expenses (ongoing cost discipline and lower notable items net of elevated regulatory and compliance spend, although CBA had to pay additional remediation costs in its aligned advice businesses, the bank still managed positive “Jaws” in 2H20). With the exception of BEN that underperformed in most KPIs, the other regionals (ABA, MYS and SUN Bank) experienced higher operating income (due to higher NIM and volume growth) and lower operating expenses – that provided a pleasant twist in challenging times that also strongly emphasised discipline in managing for profitable growth.
ANZ has decided to pay its deferred FY20 interim dividend (25¢ fully franked, equivalent to 46% statutory payout in 1H20) given its strong 11.3% pro-forma CET1 ratio. Likewise, CBA’s strong 12.2% pro-forma CET1 ratio probably enabled it to declare a FY20 final dividend of 98¢ (just under 50% statutory payout). Not only was organic capital generation strong in ANZ and CBA but these banks also benefited from non-core asset disposals (NAB is in this camp now given a post-MLC sale 11.9% proforma CET1 ratio). ABA and SUN paid a FY20 final dividend (respectively 11¢ or 50% 2H20 payout and 10¢ or 46% 2H20 payout, both target payout ratios maintained and with SUN still intending to return surplus capital to shareholders – $823m based on CET1) while BEN (FY20 final dividend deferred given uncertainties), MYS (FY20 final dividend cancelled given uncertainties and the need for extra capital to support its restructured balance sheet, target payout ratio lowered from 70-90% to 60-80% in the meantime) and WBC (deferred FY20 interim dividend cancelled given uncertainties and the desire to retain a strong balance sheet) were the exceptions.
Forecast and price target changes
ANZ: We have slightly fine-tuned FY21 and FY22 cash profit forecasts (-6% and -3% respectively) for higher credit impairment charges while our FY22+ forecasts are unchanged. Consequently, ANZ’s price target and Buy rating are also unchanged.
CBA: FY21 and FY22 cash earnings are trimmed by 4% and 3% respectively after raising expected loan impairment expenses while subsequent years’ cash earnings are unchanged. The net impact is a ~6% lower price target of $73.50 that also includes lower surplus capital (i.e. 25% vs 100% previously). The Hold rating is unchanged.
MYS: Our forecasts reflect better NIM outcomes in FY21/FY22/FY23 and cash NPAT is increased by 12%/6%/3% respectively. The price target is increased by ~3% to $4.20 and the Buy rating is unchanged based on value (i.e. TSR >15%).
A shot of MQG and a splash of ANZ and SUN
MQG remains the top pick in our coverage universe. ANZ is our preferred major bank while SUN is our preferred regional/diversified play.