The Australian financial system is strong and well-capitalized to sustain the economy in the face of increasingly difficult financial and economic conditions.
Australian banks possess substantial capitalization levels, and their robust capital framework further bolsters their resilience. Australian banks are subject to prudential regulations that are, for the most part, more stringent than those of Basel III. The capital ratio of banks is still significantly higher than the legally required minimum. Because of this, compared to certain other jurisdictions, the Australian banking system's capital levels have been less susceptible to rising interest rates.
In recent years, retained earnings have strengthened the capital base of Australian banks. Net interest margins (NIMs), lending growth, and low levels of non-performing loans (NPLs) have all contributed to banks' recent profitability. NIMs have been negatively impacted by the fierce competition among banks for high-quality borrowers.
In recent years, strong lending standards, high savings rates, and low unemployment have all contributed to the asset quality of Australian banks. ( Reference: Reserve Bank of Australia )
Let's keep an eye out for the top five ASX banking and finance companies that are listed on the Australian Stock Exchange (ASX) and maintain strong financials with superior management. These are listed in the following order:
Note: The market capitalization and the share price have been detailed, cherry-picking ASX companies as of 19 January 2024.
Suncorp Group Limited (ASX: SUN)
Market cap: $17.78 billion
CMP: $14
In order to improve efficiency and customer focus, Suncorp is reorganizing its operations strategically. The establishment of three primary insurance functions, namely Consumer, Commercial & Personal Injury, and New Zealand, will result in all-encompassing end-to-end duties, which will ultimately enhance customer satisfaction and financial results. The organization of Suncorp Bank is unchanged. Suncorp projects a 10% GWP growth in insurance in the FY2024 outlook, driven by premium adjustments. Higher yields and premium momentum will likely keep the underlying ITR robust. Focus areas for Suncorp Bank include competitive home loan growth and a NIM target of 1.85% to 1.95%, as well as aiming for a mid-50s CTI ratio.
Steadfast Group Limited (ASX: SDF)
Market cap: $6.20 billion
CMP: $5.60
Steadfast maintains a positive outlook going into 2024 and has recently upgraded its earnings guidance for FY24 to an underlying EBITDA of $520–530 million and an underlying NPAT in the range of $240–250 million, which would mark a significant improvement from the previous year and would allow the company to drive consistent growth in its financial performance similar to the past few years. The recent acquisitions carried out by the company are part of a bigger and currently more aggressive acquisition strategy, which will facilitate Steadfast's ability to expand and improve its service capabilities while also enabling it to tap into geographical expansion.
Insurance Australia Group Limited (ASX: IAG)
Market cap: $13.84 billion
CMP: $5.765
IAG's adept cost management strategies were evident as the group's expenses aligned with the targeted range of $2.5 billion, resulting in an improved administration expense ratio of 14% (compared to 14.9% in FY22). However, there were fluctuations in the underlying claims ratio, which increased to 56.7% from 53.3% in FY22. This was influenced by higher claims inflation, particularly in home and motor portfolios, primarily in the first half. Nevertheless, there was an improvement in the underlying claims ratio in the latter half of the year, settling at 55.3%.
Washington H. Soul Pattinson and Company Limited (ASX: SOL)
Market cap: $11.91 billion
CMP: $33
SOL’s profits, despite rising, were contributed to by a range of unsustainable factors, primarily the share of results from equity-accounted associates, leaving the company highly dependent on revenues from its equity positions as opposed to its organic operations. Further, the profits in the previous year were also deflated given the extraordinary level of tax expenses. Generally, profits would be expected to fall in the coming years if outside factors were not given any consideration, with additional potential for them to amplify the decline in profitability. The cash flows are evident, as the company has already seen a substantial fall in them.
Medibank Private Limited (ASX: MPL)
Market cap: $10.51 billion
CMP: $3.815
The primary areas of focus for Medibank Health and Health Insurance continue to be targeted organic and inorganic growth. Strong and dynamic relationships are being maintained between the company and the hospitals; more importantly, partnership models are the foundation of the company's growth strategy. The company anticipates that ADR will continue to yield benefits over the next five years and that the proportion of lives insured that are under 30 years old will rise due to its dominant position in the family market. MPL is committed to expanding its market share by leveraging its dual-brand strategy even more.
Reference: *All Data has been sourced from Company announcements and Refinitiv, Thomson Reuters
Frequently Asked Questions (F.A.Q)
What are the major ASX financial companies?
• Suncorp Group Limited (ASX: SUN)
• Steadfast Group Limited (ASX:SDF)
• Insurance Australia Group Limited (ASX: IAG)
• Washington H. Soul Pattinson & Company Limited (ASX:SOL)
• Medibank Private Limited (ASX: MPL)
What is the outlook of Steadfast Group Limited?
With an underlying EBITDA of $520–530 million and an underlying NPAT in the range of $240–250 million, Steadfast has upgraded its earnings guidance for FY2024, which would be a significant improvement over the previous year and enable the company to drive consistent growth in its financial performance similar to the previous few years. Steadfast continues to have a positive outlook for 2024.
Delineate the Australian financial system.
• Australian banks have high levels of capitalization, which have been further strengthened by a strong capital structure. Prudential rules that apply to Australian banks are generally stricter than Basel III's requirements.
• Bank capital ratios remain substantially above the regulatory norms prescribed. Because of this, the capital levels of the Australian banking system have been less vulnerable to rising interest rates than those of some other jurisdictions. Strong and well-capitalized, the Australian financial system can support the country's economy even in the face of progressively challenging financial and economic circumstances.
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