Shifting fortunes for ANZ, more of the same for CBA in 2017
Australian banks are well-positioned as they head into 2017, with ANZ moving from least profitable in 2016 to become one of the sector's top performers and CBA remaining an investor favourite.
Glenn Freeman: I'm Glenn Freeman for Morningstar and I'm joined today by our Head of Australian Banking Research, David Ellis.
David, thanks for joining us today.
David Ellis: It's a pleasure, Glenn.
Freeman: Commonwealth Bank was the highest traded stock on the ASX last year. Do you expect a similar level of popularity this year?
Ellis: Yes, very much so. I mean, obviously, Commonwealth Bank is the largest stock as far as market capitalisation is concerned. It's got a relatively large retail shareholder base. Approximately 55 per cent of its shareholders are retail.
So, we'll see a lot of activity in Commonwealth Bank, but also all four major banks, because of their market size and very high weightings in retail investor portfolios that will contribute.
We might also see some buying from domestic institutional investors that are underweight the major banks and international institutional investors, again, that are very much underweight the Australian major banks.
Freeman: And on to ANZ Bank, they've announced a couple of divestments in recent times. Last year, they sold off their wealth management operation and they have just recently announced some sales in New Zealand. Can you just talk us through that and how material that is for the company?
Ellis: Yes, not a surprise. I mean, it's been well-flagged. ANZ CEO, Shayne Elliott, started on the first of January 2016 and during 2016 undertook a number of major structural changes, and restructured the business and sold assets, and this is a follow-on from that and I expect we'll see more of the same in 2017 and possibly into 2018.
It's interesting that ANZ has changed from being the worst-performing bank of the four major banks at the beginning of 2016 to now one of the best-performing, as far as share price is concerned. So, it's turned around significantly.
And it's now got the highest capital levels of the four major banks which we may see--ironically, we may see capital management initiatives from ANZ in 2018-2019. So, we may see share buybacks or potentially special dividends from ANZ in 2018 and/or 2019.
Freeman: And lastly, David, what do you see as the biggest opportunities for banks in 2017 and some of the biggest challenges?
Ellis: I started off by saying I expect modest to a moderate earnings growth in 2017. Well, it's possible the banks will surprise on the upside. So, earnings growth could be higher than I'm forecasting. The banks are so big, the four major banks are so big that their profits for 2017 are pretty baked in, locked in now even though there is still a number of months to go.
So, we're seeing greater economic optimism coming out of the US following the US presidential elections in early November, and I'm hoping that that will extend globally and the Australian banks will benefit from that. So, there's upside there.
There's upside from a slightly better economic outlook in Australia than currently is anticipated. Bad debts could be lower than a lot of people fear. House prices could hold up--or I expect they will hold up in 2017. So, I'm not expecting any major problems there.
The big focus, as I said earlier, was on capital and dividends. So, the international banking regulator is expected to announce tougher capital rules and the Australian regulator, APRA, will likely pass those rules through to the Australian banks.
But there's now a greater expectation that those rules have been watered down and that the four major Australian banks are already well-capitalised with strong balance sheets, strong liquidity and funding. So, there's less pressure on capital raises in 2017 and I don't expect there will be--there will be no need for any one-off capital raisings.
And importantly, I think, their dividends will not be cut in 2017 and I'm expecting a modest increase in CBA's dividend and flat dividends for ANZ, for NAB and for Westpac in 2017.
Freeman: Thanks very much for your time today, David.
Ellis: Pleasure, Glenn. Thank you.
Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.