Major Banks - Morgans

Financial Services│Australia│Equity research│January 29, 2018

Major Banks Enough to be excited about ■

We believe the major banks sector as a whole presents good value at current share prices and for this reason we have an Add recommendation on all four majors.

■

Some of the value in the major banks is attributable to a heightened regulatory risk premium in our view. This is particularly stemming from the announcement of a Royal Commission (RC). Our base case is that the RC will not ultimately result in capital raisings or dividend cuts. We are therefore of the view that RC-related share price weakness presents good opportunity to buy yield.

■

We believe there is strong potential for further divestments to be announced this year, which would increase the scope for return of capital to shareholders.

■

WBC remains our preferred major bank.

We see more upside risk than downside risk to consensus earnings forecasts We expect the asset quality environment to remain benign over the next 12 months, creating scope for upside risk to earnings forecasts despite the cost of risk (credit impairment charge as a percentage of the loan book) for three of the four major banks hovering at cyclically low levels. We expect net interest margins to generally expand from 2H17 to 1H18F, which together with recently improved consumer sentiment and with interest-only home loan flows having re-based, will be supportive of income growth. Investment spend is being increasingly focused on digitisation and automation, and is resulting in increased focus on headcount reduction, which places the sector in a good position to achieve positive jaws on an underlying basis.

Expect regulatory risk premium to subside over next year We expect the cost of equity capital (COEC) being factored into major bank share prices to reduce as a result of reduction in perceived RC-related regulatory risk over the next year. Our base case is that the RC will not ultimately result in customer redress large enough to warrant capital raisings or dividend cuts as the banks are now largely in comfortable CET1 capital positions. We are therefore of the view that share price weakness stemming from RC-related risk presents good opportunity to buy yield. There is also reason to believe that the RC marks the peak of regulatory risk for the Australian major banks, particularly with some members of the Council of Financial Regulators (CFR) reportedly suggesting to the Federal Treasurer that politicisation of the banking sector has now gone too far.

Strong capital positions are creating scope for return of capital The major banks, with the exception of NAB, have largely completed their capital builds. Furthermore, we are of the view that the Basel III reforms finalised last month do not pose a threat to the ‘unquestionably strong’ regulatory capital framework announced by APRA last year. These factors create scope for capital returns from ANZ, CBA and perhaps even WBC. We believe there is strong potential for further divestments to be announced this year, which would increase the scope for return of capital to shareholders.

WBC remains our preferred pick We believe the major banks sector as a whole presents good value at current share prices and for this reason we have an Add recommendation on all four majors. Based on our forecasts and DDM valuation methodology, the COEC being factored into WBC’s share price is the highest of the major banks. This is despite our view that WBC in overall terms has the lowest risk profile of the major banks. We expect the COEC factored into WBC’s share price to reduce over the next 12 months, which together with its dividend yield should result in the highest 12-month total shareholder return of the majors. Azib Khan T (61) 2 9043 7903 E [email protected]

Figure 1: Recommendations and share price targets Ranking Recommendation

Share price at Target price ($) close of 29/1/18 ($)

Previous target price ($)

Forecast TSR

1. WBC ADD

31.11

36.00

37.00

24.4%

2. NAB

ADD

29.26

33.50

34.50

24.2%

3. ANZ

ADD

28.63

30.00

30.00

12.8%

4. CBA

ADD (previously Hold)

79.19

81.50

80.00

10.7%

SOURCES: MORGANS, COMPANY REPORTS

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

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Contents Sector view ...................................................................................................................... 3 Positives ........................................................................................................................ 3 Risks .............................................................................................................................. 4 Valuations ........................................................................................................................ 5 Cost of equity capital...................................................................................................... 6 Rankings .......................................................................................................................... 7 1. WBC (ADD)................................................................................................................ 7 2. NAB (ADD) ................................................................................................................ 7 3. ANZ (ADD) ................................................................................................................. 7 4. CBA (ADD) ................................................................................................................ 8 Margins............................................................................................................................. 9 Headwinds ..................................................................................................................... 9 Tailwinds ...................................................................................................................... 10 Summary of NIM forecasts .......................................................................................... 10 Credit growth ................................................................................................................. 11 Home lending growth has held up well ........................................................................ 11 Commercial lending growth outlook improving ............................................................ 12 Non-interest income ...................................................................................................... 13 Markets & treasury income .......................................................................................... 13 Fee income .................................................................................................................. 13 Expenses........................................................................................................................ 13 Asset quality .................................................................................................................. 14 Cost of risk at cyclically low levels but further reduction possible ................................ 14 Troublesome exposures .............................................................................................. 16 Housing........................................................................................................................ 16 Capital ............................................................................................................................ 17 Finalised Basel III reforms do not pose threat to ‘unquestionably strong’ benchmark.. 17 Capital management potential ..................................................................................... 17 Royal Commission ........................................................................................................ 18 Base case is no capital raisings or dividend cuts ......................................................... 18 Potential impact on earnings ........................................................................................ 19 This may be the peak of regulatory risk for the sector ................................................. 19 Use of super funds may attract significant attention..................................................... 19 Appendix: Investment fundamentals ........................................................................... 20

2


Sector view Positives 



Credit growth o

The major banks all met APRA’s 30% limit on new interest only flow as a percentage of total new residential mortgage lending in the Sep-17 quarter. With new interest-only flows now re-based, the majors can choose to grow new interest-only flow in line with system new home loan flow growth.

o

The majors are competing aggressively for owner-occupier (OO) principal & interest (P&I) home loans. Improvement in new loan flow in this segment will provide the majors with more scope to grow interest-only home loans.

o

The Westpac Melbourne Institute Index of Consumer Sentiment has been increasing in recent months. The average reading for the Index in the Dec-17 quarter was 5% above the average for the Sep-17 quarter. The index has since increased 1.8% from 101.3 in December to 105.1 in January. This is the best monthly index read since late 2013 and the most positive start to a calendar year since 2010.

o

There are early signs that the phase of institutional loan book contraction for the major banks may be over. Comfortable capital positions mean the banks no longer need to contain loan growth to build capital positions.

o

Strong business conditions, together with talk of income and business tax cuts, are supportive of the outlook for SME loan growth.

Margins o

Full period impact of interest-only home loan repricings that took place last year will come through in 1H18.

o

The rollover of expensive 12-month term deposits locked in over the Aug-16 to Nov-16 period will support NIM movement from 2H17 to 1H18F.

o

While bank bears are highlighting that continued switching from interest-only to P&I home loans will be a drag on NIMs, it should be noted that the rate of monthly switching generally slowed over the 3 months ended 30/10/17 according to data disclosed by the majors. Also, we expect APRA to announce more granular mortgage risk weight floors such that interest-only home loans attract a higher risk weight than comparable P&I loans. If this materialises, then the impact of switching on ROE will be muted.

o

The marginal cost of term wholesale funding has been falling. We expect this to have a directly positive impact on NIMs as well as an indirectly positive impact through further reduction in term deposit competition.

o

The majors have recently reduced savings deposit rates which supports the near-term NIM outlook.

o

The major banks’ Net Stable Funding Ratios (NSFRs) are in comfortable positions, which means the terming out of wholesale funding is now coming to an end in our view.

3






Asset quality o

The outlook for resource exposures and NZ dairy exposures has improved significantly compared to one year ago in our view.

o

If the environment for asset quality remains benign, then there is scope for write-backs and recoveries to remain strong while new impaired assets reduce. This can result in further declines in the cost of risk (credit impairment charge as a percentage of the loan book) for the major banks.

Capital and dividends o

In our view, capital builds for the major banks – with the exception of NAB – are now largely complete.

o

Basel III reforms were finalised by the Basel Committee on Banking Supervision (BCBS) last month and we do not see them as posing a threat to the ‘unquestionably strong’ regulatory capital framework set by APRA last year.

o

Not only do we not expect any cuts to nominal dividends for the majors over our forecast period, we believe there is scope for capital returns from some of the major banks. We are forecasting $6.4bn of share buybacks in the case of ANZ. We are forecasting CBA to have excess CET1 capital of ~$4bn by end-FY19 in the absence of an AUSTRAC-related fine. WBC’s CET1 capital ratio at Sep-17 was already above APRA’s ‘unquestionably strong’ benchmark of 10.5%, and if WBC’s loan growth turns out to be less than 6% pa over our forecast period then we believe WBC may be in a position to return capital to shareholders in the form of special dividends.

Risks House prices 

Housing affordability is increasingly a concern for the Australian public and it is therefore gaining in prominence on the political agenda at the federal level. We continue to see the biggest risk to the housing market as being from a sustained reduction in foreign investment in Australian housing. This can occur due to a change in policy on the part of Australian state and federal governments or due to improved effectiveness of capital controls in China. We believe there is greater risk of such policy change on the part of the Australian federal government taking place under a Labor government.



The Labor opposition has proposed negative gearing reforms aimed at improving housing affordability and home ownership. Labor has proposed to limit negative gearing to new housing and to halve the capital gains tax discount for investment properties held longer than 12 months from the current 50% to 25%. Existing investments will be fully grandfathered. If such reforms eventuate, then there will be an increased risk of house price softness although house price falls will not necessarily be the outcome.

Regulatory risk 

There is a risk that the RC may uncover a material area of misconduct that ultimately leads to a material amount of customer redress. There is also the risk that the RC and other regulatory reviews will result in increased regulatory and compliance spend for the sector.

4


Global macro risks 

We see a risk of disruption to USD capital markets. We see the increasing prominence of the yuan in global trade as posing a threat to the dominant status of the USD. While this will likely be a gradual process, it creates scope for bouts of volatility in debt capital markets and creates the risk of significant widening in credit spreads for periods of time. Notable developments in this regard are as follows: o

China is expected to launch a yuan-denominated oil futures contract with the yuan fully convertible to gold. Media reports suggest these contracts may commence trading in Shanghai in the next month.

o

There is media speculation that the governor of China’s central bank has met the finance minister of Saudi Arabia to discuss a date when Saudi Arabia may begin to accept yuan for oil sales to China.

o

Earlier this month, the central bank of Pakistan allowed yuan to be used in bilateral trade with China. Other non-oil producing nations that are part of China’s One Belt One Road Initiative may follow suit.

Valuations Figure 2: Key valuation metrics ANZ ($28.63)

CBA ($79.19)

NAB ($29.26)

WBC ($31.11)

FY18F

FY19F

FY20F

FY18F

FY19F

FY20F

FY18F

FY19F

FY20F

FY18F

FY19F

FY20F

13%

13%

14%

19%

18%

18%

14%

15%

15%

17%

17%

17%

P/NTA multiple

1.6

1.6

1.5

2.4

2.3

2.2

1.8

1.7

1.6

2.0

1.9

1.8

Cash EPS growth

-2%

6%

4%

4%

1%

4%

-9%

13%

7%

6%

4%

5%

Cash RONTA

P/E multiple Dividend yield

12.4 5.6%

11.6 5.6%

11.2 5.9%

13.3

13.2

12.7

12.9

11.4

10.7

5.4%

5.5%

5.7%

6.8%

6.8%

6.8%

12.2 6.1%

11.7 6.3%

11.2 6.5%


Figure 3: P/TE versus RoTE 4.0 3.5 3.0

End-2H17F P/TE

CBA

2.5

WBC NAB

2.0 ANZ 1.5

1.0 0.5 5%

10%

15%

20%

25%

30%

FY18F Cash RoTE SOURCES: MORGANS, COMPANY REPORTS

5


Figure 4: Recommendations and share price targets Ranking Recommendation

12 month prosective fully franked div yield

12 month Share price at Target price ($) Previous target Share price prospective close of 29/1/18 price ($) upside/downside gross div yield ($)

Forecast TSR

1. WBC ADD

6.1%

8.7%

31.11

36.00

37.00

15.7%

24.4%

2. NAB

ADD

6.8%

9.7%

29.26

33.50

34.50

14.5%

24.2%

3. ANZ

ADD

5.6%

8.0%

28.63

30.00

30.00

4.8%

12.8%

4. CBA

ADD (previously Hold)

5.4%

7.8%

79.19

81.50

80.00

2.9%

10.7%


Cost of equity capital Our valuation for each major bank is based on a dividend discount model (DDM) valuation methodology. The cost of equity capital (COEC) we need to factor into our valuation models to arrive at current share prices ranges from 9.49%10.27% as shown in the following table. Historically, a COEC of 9-11% has generally been factored into major bank share prices. Our current Capital Asset Pricing Model (CAPM) assumptions are a risk-free rate of 4% and equity risk premium of 6%. Figure 5: Cost of equity capital implied by current share prices Cost of equity capital

Corresponding beta

ANZ

10.01%

1.00

CBA

9.49%

0.92

NAB

10.27%

1.05

WBC

10.26%

1.04 SOURCES: MORGANS, COMPANY REPORTS

COECs for the sector increased materially after the announcement of the major bank levy as part of the Federal Budget in May 2017. We believe this was due to a higher regulatory risk premium being factored into share prices for the sector. We believe current share prices continue to factor in significant regulatory risk as a result of the announcement of the RC into the banking sector. There is the risk that a material area of misconduct will be uncovered by the RC, which ultimately leads to a material dollar amount of customer redress. However, the banks generally have strong regulatory capital positions at the moment, so our base case is that potential redress will not result in capital raisings or dividend cuts. Share price weakness stemming from RC concerns presents good opportunity to buy yield in our view. Our base case is that investor concern about the RC will abate over the next 12 months, and for this reason we expect COECs for the sector to decrease from current levels. The following table sets out the COEC we are factoring into our 12-month target price for each of the major banks. Figure 6: Cost of equity capital factored into our price targets Cost of equity capital

Corresponding beta

ANZ

9.80%

0.97

CBA

9.35%

0.89

NAB

9.60%

0.93

WBC

9.50%

0.92 SOURCES: MORGANS, COMPANY REPORTS

6


Rankings 1. WBC (ADD) Positives 

Strong capital position with CET1 capital ratio above APRA’s ‘unquestionably strong’ benchmark at 30/9/17.



Good underlying earnings momentum with NIM expansion across all business divisions from 1H17 to 2H17.



NIM stands to benefit most, alongside CBA, from any increase in the RBA’s Official Cash Rate with all else constant.



Relatively low risk profile in terms of loan book positioning due to skew to Australian mortgages.



Relatively low reliance on treasury and markets income, which is a volatile income stream.

Negatives 

Most exposed to interest-only home loans, which are generally higher risk than comparable P&I home loans.



Arguably exposed to more RC-related risk on the retail banking front than ANZ and NAB.

2. NAB (ADD) Positives 

Well placed to benefit from any pick-up in SME loan growth.



NAB is in the process of closing technology gap with CBA and WBC through acceleration of investment spend.



Currently offering highest dividend yield of the major banks.

Negatives 

Currently in weakest CET1 capital position in our view. We expect NAB’s capital build to continue through two more discounted DRPs.



Relatively low RoTE, resulting in relatively low organic capital generation capacity and relatively low sustainable dividend payout ratio.



Relatively high risk profile in terms of positioning of loan book.



There is a risk that the RC may uncover a material area of misconduct on the SME front. This risk applies to NAB more so than the other majors given that NAB has most SME market share.

3. ANZ (ADD) Positives 

Very strong capital position. We are forecasting share buybacks totalling $6.4bn over our forecast period.



ANZ has recently increased reliance on mortgage brokers, which should assist home loan growth in Australia.

7


Negatives 

Capital release from announced divestments is not enough to make up for the corresponding earnings hole. That is, we expect the divestments announced to result in a negative impact on group cash EPS even after capital management initiatives are undertaken.



Performance of the institutional business remains underwhelming. We continue to believe that unintended loss of high value customers may be contributing to the poor NIM and ROE outcomes of this division.

4. CBA (ADD) Positives 

Currently in comfortable capital position. We are forecasting ~$4bn of surplus CET1 capital by end-FY19 in the absence of an AUSTRACrelated fine.



Capital position may be further boosted by potential divestment of following businesses: CFSGAM; Australian general insurance business; and Indonesian life insurance business.



NIM stands to benefit most, alongside WBC, from any increase in the RBA’s Official Cash Rate with all else constant.



Highest return on tangible equity (RoTE) of the major banks, meaning it has the greatest organic capital generation capacity and highest sustainable dividend payout ratio of the major banks.



Relatively low risk profile in terms of loan book positioning.



Best placed on the technology front.

Negatives 

Potential for AUSTRAC-related fine.



Risk of fine from an offshore regulator for AML breaches.



Risk of credit rating cut and/or increase in regulatory capital requirement for operational risk stemming from AML breaches and APRA’s prudential inquiry into CBA.



Arguably most exposed to RC-related risk on the retail banking and wealth management fronts.

8


Margins Headwinds Major bank levy The full period impact of the major bank levy, which became effective on 1/7/2017, will be a drag on NIM movement from 2H17 to 1H18F. However, net interest margin momentum in the Sep-17 quarter was generally quite encouraging despite the Sep-17 quarter bearing the full impact of the levy. CBA’s Sep-17 quarter trading update showed that its NIM expanded from 2H17 to 1Q18. In WBC’s case, the 2H17 exit margin was higher than the 2H17 NIM.

Increased OO P&I competition Since the 30% new interest-only flow limit was announced by APRA in March, the banks have stepped up competition for owner-occupier (OO) P&I home loans particularly through increased front book discounting. We expect this to be a drag on NIM movement from 2H17 to 1H18F.

Switching from IO to P&I Interest-only (IO) home loans were repriced up significantly post the introduction of the 30% flow limit on new IO loans. While this provided a boost to NIMs in 2H17, some of the positive NIM impact will wear off going forward as some IO borrowers switch to P&I due to the interest rate difference. While such switching will be a drag on NIMs going forward, a couple of points are worth noting: 

The rate of monthly switching slowed from Aug-17 to Oct-17 at least in the case of NAB and WBC. NAB provided the following chart showing the slowdown.

Figure 7: NAB’s interest only conversions to P&I

SOURCES: NAB



We expect APRA to announce a granular mortgage risk weight framework later this year such that riskier mortgages attract a higher risk weight. From this perspective, switchings will have less of an impact on the ROE of the mortgage book as we expect P&I home loans to attract lower risk weights than comparable IO home loans.

9


Tailwinds Loan repricings The full period impact of loan repricings carried out last year will be a tailwind for NIM movement from 2H17 to 1H18F.

Term deposit spreads The major banks offered very attractive 12-month term deposit rates of ~3% in the Aug-16 to Oct-16 period. We expect NIM movement from 2H17 to 1H18F to benefit from these term deposits rolling over late last year onto lower rates.

Repricing of savings deposits The major banks have in recent months continued to cut base rates being offered on online savings accounts and we expect this to support NIM movement from 2H17 to 1H18F. The following chart, based on data provided by the RBA, shows how base rates offered by prominent providers, including the five largest banks, have changed since the last Official Cash Rate cut in August 2016. Figure 8: Online savings account rates 1.75 1.70 1.65

1.60 1.55 1.50 1.45 1.40

SOURCES: MORGANS, RBA

Summary of NIM forecasts The following table summarises our forecast NIM movement from 2H17 to 1H18F for each of the major banks. Figure 9: NIM movement from 2H17 to 1H18F (bps) ANZ

CBA

NAB

2.1

7.3

1.4

1.9

Front to back book and retention repricing

-1.1

-1.7

-1.1

-1.5

Switching from IO to P&I

Mortgage repricing

WBC

-0.4

-0.5

-0.4

-1.0

TD spreads

1.2

1.5

2.1

2.4

Online savings account spreads

0.3

0.5

0.4

0.5

Wholesale funds pricing and mix

0.5

0.5

0.5

0.5

-2.3

-5.4

-2.6

-2.4

Major bank levy Asset mix and other Total

-2

0

0

2

-1.7

2.3

0.4

2.4


The following chart shows our three-year NIM forecasts for each major bank.

10


Figure 10: Group net interest margin

2.50%

2.30%

2.10%

1.90%

1.70%

1.50% 1H05A

1H06A

1H07A

1H08A

1H09A

1H10A ANZ

1H11A

1H12A CBA

1H13A

1H14A

NAB

1H15A

1H16A

1H17A

1H18F

1H19F

1H20F

WBC


Credit growth Home lending growth has held up well System home loan growth for the 12 months ended 30 November 2017 was 6.4%. Growth has held up well since the introduction of the 30% cap on interestonly home loan flows in March 2017. As we had expected, investor home loan growth has slowed since Mar-17 and OO home loan growth has picked up. This dynamic is evident in the following chart. Price competition for OO P&I home loans remains intense and we expect this to continue to support OO home loan growth. On the IO front, the major banks reduced new IO flow to less than 30% of total new residential mortgage lending in the Sep-17 quarter. The major banks now have the option to grow new interest-only flow in line with system new home loan flow growth. Competing aggressively in the OO P&I space provides increased scope to grow new IO flow. The fact that there was general slowing in the monthly rate of switching from IO to P&I in the Sep-17 quarter, leads us to assume that the switching was driven by owner-occupiers and it also provides reason to believe that investors are generally still keen to hold on to interest-only home loans despite carrying higher rates than P&I loans. Thus despite IO rates being meaningfully higher than comparable P&I rates, there may continue to be demand for IO loans on the part of investors.

11


Figure 11: System home loan growth 12.0 10.0 8.0 6.0 4.0 2.0 0.0

System housing

System OO

System investor

SOURCES: MORGANS, RBA

Commercial lending growth outlook improving There are early signs that the phase of institutional loan book contraction for the major banks may be over. While the majors generally remain focussed on ROE in this space, we expect institutional lending to be less of a drag on overall loan growth going forward compared with the last couple of years. Comfortable capital positions mean that the banks no longer need to contain loan growth in order to build capital On the SME lending front, the growth outlook is supported by improving business conditions. However, improved business conditions will likely need to translate to improved business confidence before SME loan growth meaningfully picks up. The outlook for SME loan growth is also being supported by the following factors: 

Simplified SME loan contracts;



Removal of non-monetary default clauses;



Signs of increased willingness on the part of the banks to provide unsecured loans to SMEs up to a certain limit; and



Talk of income tax and business tax cuts.

12


Non-interest income Markets & treasury income Figure 12: Markets and treasury income ($m) 2500

2000

1500

1000

500

0 FY15

FY16 ANZ

CBA

FY17 NAB

WBC

SOURCES: MORGANS, COMPANY REPORTS Note: Data shown for CBA does not include treasury income

Treasury income and markets non-customer income outcomes were generally quite soft in 2H17. Markets customer income, on the other hand, held up quite well. A sceptic may suggest that the weakness in non-customer and treasury outcomes was due to the banks adopting conservative trading practices in light of the BBSW scandal. If such scepticism is true, then conservative trading practices may continue to be a drag on income growth in FY18. We expect treasury and markets income to be broadly flat from FY17 to FY18F for NAB and CBA. We expect to see growth for WBC over this period due to WBC experiencing exceptional weakness in 2H17. We expect to see ANZ’s treasury and markets income decrease from FY17 to FY18 due to a particularly strong outcome in FY17.

Fee income Downward pressure remains on fee income on the retail banking front and for this reason we expect fee income for the sector to generally be flat from FY17 to FY18F. However the earnings impact of a reduction in or abolishment of certain fees may be managed through the cost line. For example, the major banks may choose to manage the earnings impact of the abolishment of foreign ATM fees through the cost line by choosing to reduce the size of their respective ATM fleets.

Expenses With our forecast of 4-5% pa underlying income growth for the sector over our forecast period, we expect the major banks to continue to maintain cost discipline as they strive for positive jaws. Consequently, we expect the banks to increasingly focus on headcount reduction, particularly with investment spend being directed to digitisation and automation. The following charts show how the headcounts of the major banks have changed over the last five years.

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Figure 13: Full-time equivalent employees

Figure 14: Change in FTEs from prior period Title: 3.7% Source:

5.0%

60,000

0.9%

1.1%

1.1%

50,000

0.0%

(1.4%) (1.8%)

(0.3%)

(1.4%)

(1.8%)

(2.5%)

(3.6%)

(5.0%)

0.3%

Please them entered in you CBAfill in the values NABabove to have WBC

ANZ 40,000

2.0%

(3.0%)

30,000

(7.2%) (10.0%)

20,000

10,000

(15.0%)

2013

2014 ANZ

2015 CBA

2016 NAB

2017

(18.2%)

(20.0%)

WBC

2014


2015

2016

2017


NAB has already significantly stepped up focus on headcount reduction with it targeting a net reduction of ~4,000 by the end of FY20. This would equate to a 12% reduction in headcount over the three-year period.

Asset quality Cost of risk at cyclically low levels but further reduction possible The cost of risk (credit impairment charge as a percentage of the loan book) for the major banks has been hovering at close to cyclically low levels for some time as can be seen from the following chart. While the cost of risk can be expected to increase at some point, the environment for asset quality continues to remain benign in our view and we consequently do not expect a general increase in the cost of risk for the major banks from FY17A to FY18F. Figure 15: Credit impairment charge / opening GLA 1.00%

0.80%

0.60%

0.40%

0.20%

0.00% 1H07A

1H08A

1H09A

1H10A

1H11A ANZ

1H12A CBA

1H13A NAB

1H14A

1H15A

1H16A

1H17A

WBC


One view in the investment community is that the cost of risk for the major banks is now as low as it gets and that it can only increase from here. This is not necessarily true. If a continued benign asset quality environment results in strong write-backs and recoveries and a continued downtrend in new impaired

14


assets, then the cost of risk for the sector will likely decline further, meaning that further boosts to earnings from improving asset quality are possible. The following chart shows the trend in write-backs and recoveries over the last six years. NAB is not shown as it historically has not separately disclosed writebacks. It can be seen from the chart that while there was a downtrend in writebacks and recoveries from FY12 to FY16, there was a significant increase from FY16 to FY17 for ANZ and WBC. Figure 16: Write-backs and recoveries ($m) 800 700 600 500 400 300 200 100 0 FY12A

FY13A

FY14A ANZ

FY15A CBA

FY16A

FY17A

WBC


It is difficult to conclude at this point that the increase from FY16 to FY17 marks the start of an uptrend or higher sustained level of write-backs and recoveries as the increase seen in FY17 may be related to provisions raised for large single name institutional exposures in FY16. The impact of these large single name exposures in FY16 can be seen from the following chart, which shows the credit impairment charge excluding write-backs and recoveries. Figure 17: Credit impairment charge excluding write-backs and recoveries ($m) 3000

2500

2000

1500

1000

500

0 FY12A

FY13A

FY14A ANZ

FY15A CBA

FY16A

FY17A

WBC


WBC did say that write-backs and recoveries were high in FY17 as it worked through some of the larger loans on better terms than assumed in provisioning.

15


Troublesome exposures Resource exposures and New Zealand dairy exposures were areas of concern in FY16 from an asset quality perspective. However, the outlook for both of these areas has improved, allowing banks to reduce some of the overlay provisions held for such exposures. However, we will continue to closely monitor NZ dairy prices as dairy prices have dropped since August 2017. We note that last month Fonterra cut its forecast payout to farmers for the 2017-18 season from NZ$6.75 to NZ$6.40. At this level, most farmers should still be profitable this season and it is certainly still much better than Fonterra’s payout of NZ$3.90 in 2016. The most concerning area of exposure at this stage looks to be retail trade with the sector faced with structural challenges. The banks have consequently been monitoring such exposures carefully and in some cases have raised overlay provisions for the retail trade sector.

Housing We still do not expect to see material deterioration in the asset quality of housing exposures over our forecast period. The slowing in the rate of dwelling price growth in Sydney over the last few months is a welcome outcome as it reduces the risk of a future asset quality disaster and also means that macroprudential rules may not need to be tightened further. We believe it also reduces the chances of a macro-related credit rating cut for the major banks. In an environment of softening house prices, recently written loans generally carry more risk than the rest of the loan book as newly written loans generally have higher dynamic loan-to-valuation ratios (LVRs). From this perspective, it is comforting to note that general lending standards, including serviceability assessments, are becoming increasingly conservative. While our base case is one of no material deterioration in housing asset quality over our forecast period, we are mindful of the following risks: 

Housing affordability is increasingly a concern for the Australian public and it is therefore gaining in prominence on the political agenda at the federal level. We continue to see the biggest risk to the housing market as coming from a sustained reduction in foreign investment in Australian housing. This can occur due to a change in policy on the part of the Australian state and federal governments or due to improved effectiveness of capital controls in China. We believe there is greater risk of such policy change on the part of the Australian federal government taking place under a Labor government.



The Labor opposition has proposed negative gearing reforms aimed at improving housing affordability and home ownership. Labor has proposed to limit negative gearing to new housing and to halve the capital gains tax discount for investment properties held longer than 12 months from the current 50% to 25%. Existing investments will be fully grandfathered. If such reforms eventuate, then there will be an increased risk of house price softness although house price falls will not necessarily be the outcome.

16


Capital Finalised Basel III reforms do not pose threat to ‘unquestionably strong’ benchmark Basel III reforms were finalised last month, with one of the key outcomes being a 72.5% output floor that will be phased in over nine years. We believe this outcome does not pose a threat to the ‘unquestionably strong’ CET1 capital framework laid out by APRA last year. While we expect no changes to the aggregate level of required CET1 capital that has been indicated by APRA under the ‘unquestionably strong’ framework, we do expect APRA to propose a more granular mortgage risk weight framework later this year. If this results in a material increase in the average mortgage risk weight for the major banks, then we expect the 10.5% CET1 benchmark to be reduced commensurately such that the aggregate level of required CET1 capital remains unchanged. Finalisation of Basel III reforms and the output floor of 72.5% further improves the clarity of capital and dividend outlooks for the Australian major banks.

Capital management potential The following chart shows the APRA CET1 capital ratios of the majors at 30/9/2017. Figure 18: APRA CET1 capital ratio at Sep-17 10.7% 10.6% 10.5% 10.4% 10.3% 10.2% 10.1% 10.0%

9.9% 9.8% 9.7% ANZ

CBA

NAB

WBC


It can be seen from the chart that at 30/9/17, ANZ and WBC were already sitting above APRA’s ‘unquestionably strong’ CET1 benchmark of 10.5%, which the majors need to meet by 1/1/20. CBA’s APRA CET1 ratio was sitting at 10.1% at Sep-17, however, this was impacted by the payment of the 2017 final dividend. We are forecasting CBA’s CET1 ratio to be 10.6% at 31/12/17. We view NAB as being in the weakest CET1 capital position of the major banks with a ratio of 10.1% at Sep-17. It was no surprise that NAB offered a 1.5% discount to the dividend reinvestment plan (DRP) that accompanied the 2017 final dividend. We expect the next two NAB dividends to also be accompanied by a discounted DRP. In the case of the other major banks, we are not expecting discounted DRPs over our forecast period. In fact, there is potential for capital return from the other major banks.

17


ANZ We are forecasting ANZ to conduct share buybacks totalling $6.4bn over 1H18, 2H18 and 1H19. ANZ has already announced a $1.5bn on-market share buyback starting this month.

CBA We are forecasting CBA to have excess CET1 capital of ~$4bn relative to APRA’s ‘unquestionably strong’ CET1 benchmark of 10.5% by end-FY19. However, our forecasts do not allow for a potential AUSTRAC-related fine, and for this reason we are not forecasting any capital management at this stage. We expect every $1bn of excess CET1 capital at end-FY19 to carry potential for a special dividend of 57 cps to be paid. CBA’s CET1 capital position may receive a further boost from the following factors: 

IPO or sale of CFSGAM;



Sale of Australian general insurance business;



Sale of Indonesian life insurance business.

WBC We expect WBC to continue to run a DRP over our forecast period with no discount applied and with no DRP neutralisation. This, combined with our forecast of ~6% pa loan growth over our forecast period, results in our forecast of WBC keeping its CET1 capital ratio at 10.6% over our forecast period. That is, we do not expect any capital returns in this scenario. However, if WBC’s loan growth turns out to be less than 6% pa then there is scope for capital returns. This brings us to the next point that not all is doom and gloom in the scenario of slowing credit growth.

Royal Commission On 30 November 2017, the Federal Government announced that it will establish a Royal Commission (RC) into misconduct in the financial services sector. The announcement is clearly not a positive development as it increases the regulatory risk for the sector. However, we believe there was enough regulatory risk priced into major bank share prices prior to the RC announcement.

Base case is no capital raisings or dividend cuts There is the risk that a material area of misconduct will be uncovered, which ultimately leads to a material dollar amount of customer redress. However, the banks generally have strong regulatory capital positions at the moment, so our base case is that potential redress will not result in capital raisings or dividend cuts. We believe share price weakness stemming from RC concerns presents good opportunity to buy yield. The reason this is our base case is because the sector has been under intense scrutiny from politicians, media, consumer protection groups and class action lawyers for the last few years and we believe this limits the scope for new areas of material misconduct to be uncovered and it also limits the scope for further redress relating to currently known areas of misconduct. As the major banks noted in their jointly-written letter to the Commonwealth Treasurer regarding an inquiry into the banking and finance sector, “together with the Government and regulators, since 2014 we have been taking action to fix issues, and improve what we do and how we do it. We have collectively appeared before, or taken part in 51 substantial reviews, investigations and inquiries since the global financial crisis, 12 of which are ongoing. We continue to demonstrate our 18


commitment to doing the right thing by our customers and seeking to ensure those genuinely affected by these mistakes are appropriately compensated.” We particularly note that on 29 November 2016, the Senate referred an inquiry into the regulatory framework for the protection of consumers, including small businesses, in the banking, insurance and financial services sector to the Senate Economics Reference Committee. The terms of reference for this inquiry focus on a range of matters relating to the protection of consumers against wrongdoing in the sector. They also require the inquiry to examine the availability and adequacy of redress and support for consumers that have been victims of wrongdoing. In our view, submissions made to date in relation to this inquiry do not reveal a new area of widespread misconduct, and this helps us in forming the base case that potential customer redress stemming from the RC will not result in capital raisings or dividend cuts.

Potential impact on earnings While our base case is that the RC will not ultimately result in capital raisings or dividend cuts for the major banks, there may still be a materially adverse impact on earnings if material amounts of redress need to be paid. However, we expect the market to view such redress as one-off significant items – that is, we expect the market to ultimately focus on earnings excluding these items. Having said the above, we acknowledge the risk that even if capital raisings or dividend cuts are not required, material amounts of redress would eat into organic capital generation and this can lead to share price weakness. However, again, if dividends are not cut then share price weakness will present good opportunity to buy yield and this factor will likely provide support to share prices. The regulatory/compliance spend run-rates of the major banks are already at elevated levels, meaning that if the RC results in tighter regulation of the banks, it will not necessarily result in higher regulatory/compliance spend run-rates.

This may be the peak of regulatory risk for the sector In announcing the establishment of a RC, Treasurer Scott Morrison reportedly said he had consulted with Treasury, the governor of the RBA and the chair of APRA and that they agreed it was a “regrettable but necessary course of action…given the uncertainty, disruption and damage being done by political events”. This supports our view that the Council of Financial Regulators (CFR) understands the importance of a sound and profitable banking sector to financial stability and economic growth and it appears the CFR is now expressing the view that politicisation of the banking sector has gone too far. This provides reason to believe that we are now at the peak of regulatory risk for the sector.

Use of super funds may attract significant attention The terms of reference for the RC include inquiring into “the use by a financial services entity of superannuation members’ retirement savings for any purpose that does not meet community standards and expectations or is otherwise not in the best interest of members”. We believe there is scope for significant concerns to arise on this front, and this may result in some focus shifting from banking misconduct to misconduct in the industry super funds sector.

19


Appendix: Investment fundamentals Figure 19: Investment fundamentals ANZ ($28.63)

CBA ($79.19)

NAB ($29.26)

WBC ($31.11)

FY18F

FY19F

FY20F

FY18F

FY19F

FY20F

FY18F

FY19F

FY20F

FY18F

FY19F

FY20F

6,681

6,756

6,970

10,373

10,500

10,942

6,141

7,126

7,697

8,670

9,077

9,546

Cash EPS ($)

2.32

2.46

2.57

5.95

6.00

6.26

2.26

2.57

2.74

2.55

2.65

2.77

DPS ($)

1.60

1.60

1.70

4.31

4.35

4.54

1.98

1.98

1.98

1.90

1.95

2.01

Cash RONTA

17%

Cash earnings ($m)

13%

13%

14%

19%

18%

18%

14%

15%

15%

17%

17%

P/NTA multiple (x)

1.6

1.6

1.5

2.4

2.3

2.2

1.8

1.7

1.6

2.0

1.9

1.8

Cash EPS growth

-2%

6%

4%

4%

1%

4%

-9%

13%

7%

6%

4%

5%

P/E multiple (x)

13.3

13.2

12.7

12.9

11.4

10.7

5.6%

5.6%

5.9%

5.4%

5.5%

5.7%

6.8%

6.8%

6.8%

6.1%

6.3%

6.5%

Net interest margin

1.95%

1.93%

1.92%

2.13%

2.12%

2.11%

1.87%

1.86%

1.85%

2.12%

2.10%

2.09%

Gross LUM growth

2%

5%

5%

3%

6%

6%

5%

6%

6%

6%

6%

6%

Income growth

(4%)

2%

3%

4%

4%

5%

4%

5%

5%

5%

5%

5%

Expense growth

(5%)

(2%)

2%

4%

3%

3%

8%

(0%)

0%

3%

3%

3%

43.2%

41.6%

41.1%

40.5%

48.1%

40.1%

41.2%

40.2%

39.3%

Dividend yield

Cost-to-income ratio

12.4

45.6%

11.6

43.8%

11.2

42.0%

12.2

11.7

11.2

Credit impairment charge / GLA

0.21%

0.23%

0.25%

0.13%

0.16%

0.19%

0.17%

0.20%

0.22%

0.13%

0.17%

0.20%

CET1 ratio

10.9%

10.6%

10.6%

10.7%

11.3%

11.3%

10.3%

10.5%

10.6%

10.6%

10.6%

10.6%


20


Figure 20: ANZ financial summary FINANCIAL SUMMARY

2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

Rep. NPAT ($M)

5,709

2,911

3,495

6,406

3,626

3,225

6,851

6,306

6,970

Cash NPAT ($M)

5,889

3,411

3,527

6,938

3,389

3,292

6,681

6,756

6,970

No. shares (M)

2,928

2,936

2,937

2,937

2,887

2,837

2,837

2,726

2,724

Avg # of shares (M) Cash EPS ($)

2,907

2,924

2,929

2,926

2,917

2,854

2,885

2,744

2,716

2.03

1.17

1.20

2.37

1.16

1.15

2.32

2.46

2.57

Cash EPS growth (%)

-22%

17%

-2%

6%

4%

PER (x)

14.1

12.1

12.4

11.6

11.2

DPS ($)

1.60

0.80

0.80

1.60

1.60

1.70

Payout ratio Div Yield (%)

79%

69%

66%

5.6%

Franking (%) NTA ($M) NTA per share ($) Price to NTA ps (x)

1.60

0.80

0.80

67%

69%

69%

5.6%

69%

65%

66%

5.6%

5.6%

5.9%

100%

100%

100%

100%

100%

100%

100%

100%

100%

50,146

50,738

51,989

51,989

51,765

51,191

51,191

49,638

52,112

17.13

17.28

17.70

17.70

17.93

18.04

18.04

18.22

19.13

1.7

1.6

1.6

1.6

1.5

Cash ROE (cash NPAT / open NTA)

12%

14%

13%

13%

14%

Book ROE (NPAT / avg ord equity)

10%

12%

11%

12%

12%

INCOME STATEMENT ($M)

2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

Net interest income

15,095

7,416

7,456

14,872

7,417

7,484

14,901

15,414

16,065

Non interest income

5,499

2,887

2,730

5,617

2,453

2,342

4,795

4,685

4,695

20,594

10,303

10,186

20,489

9,871

9,826

19,696

20,100

20,760

Operating expenses

-10,439

-4,731

-4,717

-9,448

-4,527

-4,452

-8,980

-8,805

-8,966

Pre-provision profit

10,155

5,572

5,469

11,041

5,344

5,373

10,717

11,294

11,794

B&DD charge

-1,956

-720

-479

-1,199

-549

-656

-1,205

-1,348

-1,545

Pre-tax profit

8,199

4,852

4,990

9,842

4,795

4,718

9,512

9,947

10,249

-2,299

-1,433

-1,456

-2,889

-1,399

-1,396

-2,795

-2,947

-3,037

-11

-8

-7

-15

-7

-7

-14

-14

-14

Total income

Tax Minority interest Impact of sale of P&I, ADG and life business Morgans cash NPAT Specified items

0

0

0

0

0

-22

-22

-229

-229

5,889

3,411

3,527

6,938

3,389

3,292

6,681

6,756

6,970

0

226

0

226

0

0

0

0

0

5,889

3,637

3,527

7,164

3,389

3,292

6,681

6,756

6,970

-180

-726

-32

-758

238

-68

170

-450

0

5,709

2,911

3,495

6,406

3,626

3,225

6,851

6,306

6,970

KEY COMPONENTS

2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

Net interest margin

2.07%

2.00%

1.98%

1.99%

1.96%

1.94%

1.95%

1.93%

1.92%

Gross LUM growth

1%

0%

1%

1%

1%

2%

2%

5%

5%

Morgans adjusted pro-forma cash NPAT Significant items and specified items Reported NPAT

Income growth Expense growth Cost-to-income ratio B&DD charge / opening gross LUM CET1 ratio - APRA basis

0.3%

0.3%

-1.1%

-0.5%

-3.1%

-0.5%

-3.9%

2.0%

3.3%

11.3%

-4.4%

-0.3%

-9.5%

-4.0%

-1.7%

-5.0%

-1.9%

1.8%

51%

46%

46%

46%

46%

45%

46%

44%

43%

0.34%

0.25%

0.17%

0.21%

0.19%

0.22%

0.21%

0.23%

0.25%

9.6%

10.1%

10.6%

10.6%

10.9%

10.9%

10.9%

10.6%

10.6%


21


Figure 21: CBA financial summary

FINANCIAL SUMMARY

2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

Rep. NPAT ($M)

9,223

4,895

5,033

9,928

5,124

5,249

10,373

10,500

10,942

Cash NPAT ($M)

9,395

4,907

4,974

9,881

5,124

5,249

10,373

10,500

10,942

No. shares (M)

1,711

1,720

1,726

1,726

1,749

1,749

1,749

1,749

1,749


1,694

1,717

1,724

1,721

1,738

1,749

1,744

1,749

1,749

5.55

2.86

2.89

5.74

2.95

3.00

5.95

6.00

6.26

Cash EPS growth (%)

-1%

4%

4%

1%

4%

PER (x)

14.3

13.8

13.3

13.2

12.7

DPS ($)

4.20

1.99

2.30

4.31

4.35

4.54


76%

70%

80%

5.3%


4.29

2.06

2.25

75%

70%

75%

5.4%

73%

73%

73%

5.4%

5.5%

5.7%

100%

100%

100%

100%

100%

100%

100%

100%

100%

49,630

51,261

53,146

53,146

55,874

57,512

57,512

60,476

63,652

29.01

29.81

30.79

30.79

31.94

32.88

36.39

32.88

34.57

2.7

2.6

2.4

2.3

2.2

Cash ROE (cash NPAT / average NTA)

21%

19%

19%

18%

18%


17%

16%

16%

15%

15%


2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

Net interest income

16,935

8,743

8,857

17,600

9,093

9,241

18,334

19,128

20,117

Underlying other banking income

4,860

2,589

2,534

5,123

2,537

2,607

5,144

5,316

5,471

Funds mgmt income

2,016

1,004

1,030

2,034

1,015

1,045

2,060

2,222

2,372

795

393

393

786

432

436

868

800

819

24,606

12,729

12,814

25,543

13,077

13,330

26,407

27,466

28,779

141

16

49

65

79

79

158

161

165

24,747

12,745

12,863

25,608

13,156

13,409

26,565

27,627

28,943 -11,735

Insurance income Total operating income Investment earnings pre tax Total income Underlying operating expenses

-10,434

-5,284

-5,401

-10,685

-5,516

-5,548

-11,064

-11,362

B&DD charge

-1,256

-599

-496

-1,095

-443

-491

-934

-1,231

-1,541

Net profit pre tax

13,057

6,862

6,966

13,828

7,197

7,371

14,568

15,035

15,667

Income tax

-3,592

-1,950

-1,977

-3,927

-2,057

-2,107

-4,165

-4,295

-4,475 -30

Minority interest

-20

-9

-15

-24

-15

-15

-30

-30

One-off items

0

4

0

4

0

0

0

0

0

Impact of expected sale of life business

0

0

0

0

0

0

0

-210

-220

9,445

4,907

4,974

9,881

5,124

5,249

10,373

10,500

10,942

-50

0

0

0

0

0

0

0

0

9,395

4,907

4,974

9,881

5,124

5,249

10,373

10,500

10,942

CBA cash NPAT Preference dividends Morgans Cash NPAT Preference dividends

50

0

0

0

0

0

0

0

0

4

-19

-4

-23

0

0

0

0

0

-199

8

65

73

0

0

0

0

0

-27

-1

-2

-3

0

0

0

0

0

9,223

4,895

5,033

9,928

5,124

5,249

10,373

10,500

10,942

KEY COMPONENTS

2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

Net interest margin

2.14%

2.11%

2.11%

2.11%

2.13%

2.13%

2.13%

2.12%

2.11%

Gross LUM growth

9%

2%

2%

5%

1%

2%

3%

6%

6%

5.0%

3.4%

0.9%

3.5%

2.3%

1.9%

3.7%

4.0%

4.8%

Treasury shares Hedging and AIFRS volatility Other significant items Reported NPAT

Underlying income growth Underlying expense growth

4.4%

1.1%

2.2%

2.4%

2.1%

0.6%

3.5%

2.7%

3.3%

B&DD charge / opening gross LUM

0.19%

0.17%

0.14%

0.16%

0.12%

0.13%

0.13%

0.16%

0.19%

CET1 ratio - APRA basis

10.6%

9.9%

10.1%

10.1%

10.6%

10.7%

10.7%

11.3%

11.3%


22


Figure 22: NAB financial summary FINANCIAL SUMMARY

2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

352

2,545

2,740

5,285

2,845

3,393

6,239

7,224

7,795

Cash NPAT ($M)

6,483

3,294

3,348

6,642

2,796

3,344

6,141

7,126

7,697

No. shares (M)

2,657

2,675

2,686

2,686

2,724

2,757

2,757

2,805

2,822


2,657

2,668

2,681

2,674

2,705

2,740

2,723

2,788

2,815

2.45

1.24

1.25

2.49

1.04

1.22

2.26

2.57

2.74

Rep. NPAT ($M)

Cash EPS growth (%) PER (x)

-2%

2%

-9%

13%

7%

11.9

11.7

12.9

11.4

10.7

DPS ($)

1.98

0.99

0.99

1.98

0.99

0.99

1.98

1.98

1.98


81%

80%

79%

79%

95%

81%

88%

77%

72%

6.8%

6.8%

6.8%

6.8%

Franking (%)

100%

100%

100%

100%

100%

100%

100%

100%

100%

42,673

42,532

42,785

42,785

43,936

45,628

45,628

48,689

51,300

16.06

15.90

15.93

15.93

16.13

16.55

16.55

17.36

18.17

NTA ($M) NTA per share ($) Price to NTA ps (x)

6.8%

1.8

1.8

1.8

1.7

1.6


15%

16%

14%

15%

15%

Book ROE (NPAT / average ord equity)

13%

14%

12%

14%

14%


2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

Net interest income

12,930

6,393

6,773

13,166

6,927

7,055

13,982

14,652

15,368

Other operating income

4,503

2,476

2,253

4,729

2,312

2,366

4,679

4,912

5,179

Total income

17,433

8,869

9,026

17,895

9,240

9,421

18,661

19,565

20,547

Operating expenses

-7,438

-3,785

-3,850

-7,635

-4,800

-4,176

-8,977

-8,226

-8,233

B&DD charge

-800

-394

-416

-810

-455

-485

-940

-1,197

-1,372

Pre-tax profit

9,195

4,690

4,760

9,450

3,984

4,760

8,744

10,142

10,942

-2,588

-1,347

-1,363

-2,710

-1,139

-1,367

-2,505

-2,918

-3,147

-124

-49

-49

-98

-49

-49

-98

-98

-98

6,483

3,294

3,348

6,642

2,796

3,344

6,141

7,126

7,697

Tax Distributions Reported Cash NPAT Distributions

124

49

49

98

49

49

98

98

98

Significant items

-6,190

-345

-610

-893

0

0

0

0

0

Treasury shares

61

0

0

0

0

0

0

0

0

-126

-453

-47

-500

0

0

0

0

0

352

2,545

2,740

5,285

2,845

3,393

6,239

7,224

7,795

KEY COMPONENTS

2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

Net interest margin

1.88%

1.82%

1.88%

1.85%

1.88%

1.87%

1.87%

1.86%

1.85%

Gross LUM growth

Fair value and hedge ineffectiveness Reported NPAT

-7%

1%

3%

4%

3%

3%

5%

6%

6%

Income growth

3%

2%

2%

3%

2%

2%

4%

5%

5%

Expense growth (excld 1H18 restructuring provision)

2%

3%

2%

3%

5%

3%

8%

0%

0%

0.15%

0.14%

0.15%

0.15%

0.16%

0.17%

0.17%

0.20%

0.22%

9.8%

10.1%

10.1%

10.1%

10.1%

10.3%

10.3%

10.5%

10.6%

B&DD charge / opening gross LUM CET1 ratio - APRA basis


23


Figure 23: WBC financial summary

FINANCIAL SUMMARY

2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

Rep. NPAT ($M)

7,445

3,907

4,083

7,990

4,250

4,420

8,670

9,077

9,546

Cash NPAT ($M)

7,822

4,017

4,045

8,062

4,250

4,420

8,670

9,077

9,546

No. shares (M)

3,347

3,357

3,394

3,394

3,404

3,414

3,414

3,433

3,452


3,322

3,352

3,375

3,364

3,399

3,409

3,404

3,424

3,442

2.35

1.20

1.20

2.40

1.25

1.30

2.55

2.65

2.77

Cash EPS growth (%)

-5%

2%

6%

4%

5%

PER (x)

13.2

13.0

12.2

11.7

11.2

DPS ($)

1.88

0.94

0.94

1.90

1.95

2.01


80%

78%

78%

6.0%


1.88

0.95

0.95

78%

76%

73%

6.0%

75%

74%

72%

6.1%

6.3%

6.5%

100%

100%

100%

100%

100%

100%

100%

100%

100%

46,600

47,877

49,636

49,636

51,005

52,515

52,515

55,684

59,103

13.93

14.26

14.62

14.62

14.98

15.38

17.12

15.38

16.22

2.2

2.1

2.0

1.9

1.8


18%

17%

17%

17%

17%


14%

14%

14%

14%

14%


2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

Net interest income

15,348

7,693

8,011

15,704

8,218

8,421

16,639

17,527

18,514

Non interest income

5,855

3,068

2,784

5,852

2,982

3,067

6,050

6,371

6,647

Total income

21,203

10,761

10,795

21,556

11,201

11,488

22,689

23,898

25,161

Operating expenses

-8,898

-4,501

-4,604

-9,105

-4,647

-4,709

-9,356

-9,617

-9,888

B&DD charge

-1,124

-493

-360

-853

-454

-434

-888

-1,253

-1,571

Pre-tax profit

11,181

5,767

5,831

11,598

6,100

6,345

12,444

13,029

13,702

Tax

-3,344

-1,745

-1,784

-3,529

-1,848

-1,922

-3,771

-3,948

-4,152

Minority interests Cash NPAT

-15

-5

-2

-7

-2

-2

-4

-4

-4

7,822

4,017

4,045

8,062

4,250

4,420

8,670

9,077

9,546

Significant items

-377

-110

38

-72

0

0

0

0

0

Reported NPAT

7,445

3,907

4,083

7,990

4,250

4,420

8,670

9,077

9,546

KEY COMPONENTS

2016A

1H17A

2H17A

2017A

1H18F

2H18F

2018F

2019F

2020F

Net interest margin

2.13%

2.07%

2.10%

2.09%

2.12%

2.11%

2.12%

2.10%

2.09%

Gross LUM growth

6%

1%

3%

3%

3%

3%

6%

6%

6%

Income growth

3.2%

1.7%

0.3%

1.7%

3.8%

2.6%

5.3%

5.3%

5.3%

Expense growth

3.0%

0.5%

2.3%

2.3%

0.9%

1.3%

2.8%

2.8%

2.8%

0.18%

0.15%

0.11%

0.13%

0.13%

0.12%

0.13%

0.17%

0.20%

9.5%

10.0%

10.6%

10.6%

10.6%

10.6%

10.6%

10.6%

10.6%

B&DD charge / opening gross LUM CET1 ratio - APRA basis


24


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