3 Big banks to look atTeam Veye | 04 Jan 2018 ASX - ANZ, CBA, WBC
Big Three banks to watch: Australia and New Zealand Banking Group, Commonwealth Bank of Australia and Westpac Banking Corp
Major Australian banks faced pressure in 2017 hurt be several events, while Moody's downgrading of the big four Australian banks long-term credit rating to Aa3 as compared to Aa2 has been a major event. Moody’s has revised Australia’s macro credit profile leading to a downgrade of the Baseline Credit Assessment of 12 Australian banks.
On the other hand, the recent APRA guidelines is a plus to the banks as the risk is lower when banks have a strong capital position. Moody’s has also noted the Australian banks have improved their capital and liquidity in recent years. Let’s have a look of big four Australian banks position as we enter 2018!
Australia and New Zealand Banking Group
Australia and New Zealand Banking Group (ASX: ANZ) stock fell over 6% in 2018 (as of Jan 3rd, 2018; Source: Google finance) hurt by several reasons like, meeting APRA requirements, Moody’s downgrade of ANZ’s senior unsecured credit rating that was cut by one notch from Aa2 to Aa3.
Moreover, the stock sentiment dampened recently as ANZ Bank New Zealand reported that New Zealand’s Overseas Investment Office declined HNA Group’s application to acquire UDC Finance. The sale would not proceed unless HNA overturns the OIO decision. With this move, the group would get over 10 basis points of APRA CET1 capital. The group’s FY18 earnings would not be adjusted for the sale, if the sale is not proceeding. Investors were worried whether this decision would hurt their recently announced AUD 1.5 billion on-market buyback program.
But management clarified that the OIO decision would not have any impact on their buyback program, while we believe investors need to leverage this correction as an entry opportunity. ANZ sold over 16 businesses for a simpler portfolio, in order to decrease their operating risk, freed up investment and strengthened our capital position which is now the strongest of our peers
ANZ continues to focus on customer experience. We give a “BUY” at $ 28.52
Commonwealth Bank of Australia
Commonwealth Bank of Australia (ASX: CBA) stock lost over 2.7% in 2017 (Source: Google finance) hurt by reputational and regulatory issues. The bank also delayed the response on allegations from AUSTRAC. ASIC even launched an investigation whether CBA disclosed more information to the market about the AUSTRAC matter before the legal claim was lodged.
The bank agreed that they were late in filing 53,506 TTRs, which led from the same systems related error, representing 2.3% of TTRs reported by CBA to AUSTRAC between 2012 and 2015. The bank also agreed that they could not fully comply to risk assessment requirements for Intelligent Deposit Machines (IDMs).
To address this issue, CBA made major progress in boosting their policies, processes and systems relating to its obligations under the AML/CTF Act via their Program of Action. The enhanced their AML/CTF capability and reported further financial crime operations, compliance and risk professionals. They are also further focusing on their Know Your Customer processes which costs more than $85 million. Meanwhile, the bank slashed ATM withdrawal fees, while other banks followed. We Give a HOLD Recommendation at $79.97
First quarter of 2018 performance (Source: Company reports)
Westpac Banking Corp
Westpac Banking Corp (ASX: WBC) stock lost over 4.3% in 2017 (Source: Google finance) hurt by regulatory headwinds like Bank Levy, weak performance of wealth management and insurance business as well as challenging conditions at Western Australia and regional Queensland.
On the other hand, the group’s customer complaints across their Australian operations fell 18% in FY17 against pcp. Their Cash earnings enhanced 3%, with a 2% rise in operating income and a solid fall in impairment charges for bad debts. Moreover, the group’s cash earnings did not comprise $279 million pre-tax profit from BT Investment Management sale. Their banking divisions reported a cash earnings growth in the range of 4% and 18%.
CBA believes that their asset quality remained strong during the year, with the ratio of stressed assets to total committed exposures falling 15 basis points to 1.05%. The group sold their Hastings Management subsidiary to Northill.
The stock is trading at a dividend yield of 6% and has a 13.6x P/E. We give an EXPENSIVE Recommendation at $31.1
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