FOLLOWING the federal budget there has been no meaningful change in macro backdrop with continued debate surrounding a lot of the higher-profile themes of political uncertainty both domestically and in the US and, of course, the continued ‘Brexit’ discussion. Mixed US data and a soft lead from Asia are reflecting concerns over the global growth outlook, compounded by weakness in commodities.
The Australian and US Dollars defied most commentators and rallied above $0.78USD before retreating after the Reserve Bank of Australia's decision to cut the official cash rate. I expect the AUD/USD cross rate to re-establish the negative trend from last year.
Three major banks produced mixed results last week. Westpac reported first half (1H16) cash earnings up 3.3pc on the previous corresponding period (pcp), behind most estimates. The result was driven by worse than expected fee income and higher than expected expense growth. Asset quality appears to be a negative sector issue in the near term, though outside of single names, broader trends remain okay.
ANZ appears to be resetting itself after 1H16 reported cash earnings were well below consensus expectations. Surprisingly, ANZ cut its dividend per share (DPS) to 80 cents a share, down 7pc on pcp. Their asset quality was slightly better than expected, and underlying business trends were actually quite good. ANZ provided some commentary on the expected trajectory of its business mix, with its institutional business to go from greater than 50pc of group capital to 40pc. This should provide a positive boost to its return on investment target.
NAB produced a solid 1H16 result; however its dividend sustainability is still in question. NAB’s 1H16 cash earnings were up 6.5pc with a DPS of 99c. The result was driven by a better-than-expected performance on margin, slightly weaker non-interest income and lower-than-expected expenses.
The improved capital position of the major banks following equity raisings in 2015 coupled with the broad sell-off over the past year puts all the majors in an intriguing position. There is no doubt on a long term basis there is value for yield seekers, however, the horizon for the sector is not entirely clear.
- Christopher Hindmarsh is an adviser at JBWere Limited which is owned by NAB. This article contains general advice only. In preparing it JBWere didn't take into account the investment objectives, financial situation and needs of any particular person. Readers should assess if the information is appropriate for their circumstances, or contact a licensed financial adviser.
