Australian Banks: What Now?

Feature Stories | Oct 10 2018

With bank reporting season approaching, and ANZ having already issued a warning, how do brokers assess the situation from here in the wake of the Royal Commission interim report?

-ANZ Bank issues pre-FY18 release profit warning
-Interim RC report asks questions, offers no answers
-Upheaval forthcoming
-How much is priced in?

By Greg Peel

On Monday, ANZ Bank ((ANZ)) issued a profit warning ahead of its full-year earnings result release due October 31. While pre-result profit warnings are common across the market, bank profit warnings are not. But then nor are industry Royal Commissions a common occurrence.

The bank has reduced its profit expectations by -$584m after tax, or about -10%. While part of the amount is related to accelerated software amortisation, the bulk represents Royal Commission fallout – customer compensation costs, associated legal costs, and the cost of restructuring post-RC.

The important point to note is that these are not “known” costs at this stage, merely an estimate.

The charges come as no surprise to bank analysts, although at least one broker suggests they are steeper than might have been assumed. The good news is that ANZ Bank went into the RC with a solid tier one capital ratio, greater than peers. Analysts agree the capital impact of the charges equate to around -10 basis points and this will in no way jeopardise the bank’s capacity to exceed APRA’s “unquestionably strong” capital requirements.

Further good news is there is no need to cut the bank’s dividend, again, but the bad news is a lack of franking credits suggests the dividend cannot be raised from here and the share buyback previously announced will probably have to be reduced, brokers assume.

The question for investors is: Is that it? Can we now start over again from a lower base? Given how far bank share prices have fallen it becomes a matter of whether or not such charges have already been priced in. Brokers assume the other banks will need to follow suit with regard taking on RC-related provisions but any such charges can only be considered pre-emptive at this stage.

Investors should note Westpac ((WBC)) already announced -$235m in extra provisions on the final day of September.

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