Entering unchartered waters - Morgans

April 23, 2015
AUSTRALIA
Notes from the Field
Ashley Dalziell, CFA
T 612 7903 2703
E [email protected]
BS_150423
BANKS
Entering unchartered waters
We initiate coverage on the bank sector with a Neutral
recommendation. While we recognise fundamental overvaluation, it is
hard to envisage a near-term trigger for this to unwind. In this note we
review recent sector drivers and highlight our expectations for the
upcoming 1H15 reporting season. For the major banks that report in
coming weeks, we forecast 1H15 growth of 3.0% for cash EPS and 4.4%
for DPS on the pcp. ANZ is our preferred pick and only Add
recommendation in the sector. Our sector preference order is ANZ
(Add), CBA (Hold), NAB (Hold), and WBC (Hold).
Sector overvalued, but near-term unwind unlikely
Despite the recent correction, in our view the Australian bank sector remains
fundamentally overvalued. That said, the banks are not alone in this regard,
with the bank sector trading in line with its long run average relative to the
non-bank industrials. On undoubtedly the key metric for the domestic equity
market currently, the current sector yield of 5.0% still offers considerable
pick-up relative to the 10-year AU bond rate and the 12-month system term
deposit rate. Bank sector earnings growth prospects are not particularly
attractive, and we forecast just 3.0% EPS growth on aggregate for the three
banks reporting in coming weeks. Relative to domestic alternatives however,
the resources sector is still firmly in a downgrade cycle, and broader industrials
are still finding their feet. To this end, the sector continues to benefit from its
relative earnings certainty.
1H15 reporting season expectations
Key themes for this reporting season: 1) system volume has lifted on stronger
mortgage and business lending activity; 2) we expect weaker margins in 1H15
(-4bps hoh) on pressure from mortgage and corporate spreads, free funds,
low-cost deposits (offset gains from funding spreads and term deposits); 3)
with a lift in volatility, markets income is likely to recover somewhat; 4) we
expect stronger equities markets to help funds management, and no further
deterioration in life insurance; 5) we look for strong cost control although
software amortisation headwinds should continue to rise; 6) we expect a benign
bad-debt outcome; and 7) we expect little management insight on new world
regulation although do not expect DRP neutralisations in coming weeks.
Neutral sector, ANZ preferred pick
We initiate coverage on the sector with a Neutral recommendation. While we
recognise fundamental overvaluation, it is hard to envisage a near-term trigger
for this to unwind when we consider a likely later-than-expected lift in the US
Fed funds rate, strong potential for near-term rate cuts domestically, further
pressure in commodities (particularly those key for the Australian market) and
a very tepid economic backdrop restraining industrial earnings. Our sector
preference order is ANZ (Add), CBA (Hold), NAB (Hold), and WBC (Hold).
IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS
DOCUMENT. MORGANS FINANCIAL LIMITED (A.B.N. 49 010 669 726) AFSL 235410 A PARTICIPANT OF ASX GROUP.
BANKS
April 23, 2015
Entering unchartered waters
Table of Contents
SUMMARY AND CONCLUSIONS
1. SUMMARY AND CONCLUSIONS
p.2
2. LONG-TERM TRENDS
p.5
3. REVIEW OF SECTOR THEMES
p.7
4. 1H15 REPORTING SEASON GUIDE
p.16
5. COMPANY PROFILES
p.18
Sector overvalued, but near-term unwind unlikely
Despite the recent correction, in our view the Australian bank sector remains
fundamentally overvalued on a P/NTA and P/E basis particularly given
uncertainties regarding the regulatory outlook. To this end we recognise the
current sector forward PE at 14.5x is now substantially above its long run
average of 11.9x. That said the banks are not alone in this regard, with the
S&P/ASX200 enjoying a particularly strong start to 2015, benefitting from a
lower and flatter rate environment domestically, and expectations of a longer
divergence in global interest rate settings than was expected in 2014.
Figure 1: Bank sector PE (consensus 1 year forward)
17.0
16.0
Figure 2: Bank sector PE relative non-bank industrials PE
120%
x
Current: 82.5%
Current: 14.5 Avg: 11.9
Expensive
110%
15.0
14.0
Avg: 82.6%
Title:
Source:
Expensive
100%
Please fill in the values above to have them entered in your rep
13.0
90%
12.0
11.0
80%
10.0
9.0
70%
Cheap
8.0
7.0
Cheap
60%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
SOURCES: MORGANS, BLOOMBERG
SOURCES: MORGANS, BLOOMBERG
To this end, the bank sector PE relative to the non-bank industrials PE is
trading in line with its long-term average. On undoubtedly the key metric for the
domestic equity market currently, recent sector gains have driven the sector
dividend yield to just 5.0% currently, which is below the long run average. On a
relative basis however the banks still offer considerable pick-up relative to the
10-year AU bond rate and the 12-month system term deposit rate.
Figure 3: Sector dividend yield
Figure 4: Sector dividend yield vs AU 10yr bond yield & 12m
term deposit rate
10%
10.0%
Current: 5.0%
Avg: 5.5%
9%
Title:
Source:
8%
9.0%
7%
8.0%
Cheap
6%
Please fill in the values above to have them entered in your rep
5%
7.0%
4%
3%
6.0%
2%
1%
5.0%
Sector Yield
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
SOURCES: MORGANS, BLOOMBERG
AU 10yr bond
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Expensive
4.0%
1996
1995
0%
Term deposit - 12m
SOURCES: MORGANS, BLOOMBERG, RBA
Bank sector earnings growth prospects are not particularly attractive, and we
forecast just 3.0% EPS growth on aggregate for the three banks reporting in
coming weeks. Relative to domestic alternatives however, the resources sector is
still firmly in a downgrade cycle, and broader industrials are still finding their
feet. To this end, the sector continues to benefit from its relative earnings
certainty, although should the recent improvements in industrial earnings
continue, it would pose a threat to current bank sector multiples.
2
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April 23, 2015
Figure 5: FY16 consensus EPS revisions
110
105
100
95
90
85
80
75
70
Banks
Industrials
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
60
Jan-14
65
Resources
SOURCES: MORGANS, BLOOMBERG
We initiate on the sector with a Hold recommendation. While we recognise
fundamental overvaluation, it is hard to envisage a near-term trigger for this to
unwind when we consider a likely later-than-expected lift in the US Fed funds
rate, strong potential for near-term rate cuts domestically, further pressure in
commodities (particularly those key for the Australian market) and a very tepid
economic backdrop restraining industrial earnings. Our sector preference order
is ANZ (Add), CBA (Hold), NAB (Hold), and WBC (Hold) and we outline our
investment views on each below. The reporting season guide in this report
outlines our expectations for the upcoming reporting season.

ANZ (Add, TP = A$38.85): ANZ is our preferred pick of the major
banks. Within the sector ANZ offers valuation appeal trading at a 13%
discount to the sector, at levels consistent with the GFC when ANZ’s
commercial book was in melt down. We think many of the sources of
ANZ’s 1Q15 revenue weakness will be temporary, and think management’s
capacity and focus on cost management should support underlying
earnings growth in the near term. Further, we think ANZ’s asset quality
metrics have improved more than peers since the FY09-10 peak on a
number of metrics with the risk profile of the commercial book now much
improved. Recent China weakness is likely weighing on sentiment for ANZ,
although we remain optimistic that ANZ can increase returns in its Asian
business (driven by improvements to costs, margins and more broadly, an
unwind of global macroeconomic settings, which have been a headwind for
the business in recent years).

CBA (Hold, TP = A$83.81): We still see sector trends becoming less
favourable for CBA, as mortgage growth peaks, base interest rates fall,
competition builds, and household income growth slows. However, we
think its technology advantage over peers should leave it better prepared
for this backdrop, and to take advantage of continued technologically led
changes in banking. CBA will release its 3Q15 trading update on
Wednesday, May 6th.

NAB (Hold, TP = A$40.90): Since new management has begun to
deliver on its commitment to boost returns for the group (largely through
shedding non-core businesses), NAB has re-rated back toward its long run
average 7% discount to the sector, after trading at a much steeper discount
through much of 2014. After dealing with low hanging fruit, to drive
further rerating we think management needs to demonstrate sustainable
improvements in its core business banking franchise, and or achieve a
decent outcome on fully exiting the UK. In the near term we remain
concerned that further provisions for interest rate swap miss-selling may
weigh on performance. We have a Hold rating on NAB and it is our #3 pick
of the major banks.

WBC (Hold, TP = A$36.80): WBC has performed reasonably well into
its result, currently trading at a 5% premium to the sector, relative to its
1% long run average. We see WBC as expensive given a weaker-than-peer
earnings growth trajectory, greater exposure to an inevitable recalibration
3
BANKS
April 23, 2015
of mortgage capital calculations (WBC has the lowest mortgage risk
weighted asset to exposures ratio in the sector), greater exposure to
developments in macroprudential policy (given its east coast investor
lending bias) and ongoing institutional pressure. We have a Hold
recommendation and A$36.80 target price. WBC is our #4 preference of
the major banks.
Key 1H15 reporting season themes

Volumes: ANZ has outperformed peers in total lending, driven by a solid
performance across all consumer segments. NAB has added most share in
household deposits while WBC outperformed in business deposits in 1H15.

Margins: We expect a -4bp fall hoh in 1H15 as pressure on mortgage &
corporate spreads and free funds are almost offset by gains on funding
costs.

Trading income: After a weak 2H14, trends were improved in 1Q15,
which we expect carried over to 2Q15 on a lift in financial market volatility.
Treasury earnings are difficult to judge given considerable movement in
the domestic curve through the period.

Wealth: Improved inflows and higher equities markets should help funds
management. Pressure should remain on fees and we expect the worst has
passed for life insurance.

Costs: We expect productivity programmes and progress on IT
investment to be under the microscope. Some further gains are likely from
staffing, although IT amortisation headwinds will continue to increase.

Bad debts: We expect another benign bad-debts outcome, consistent
with further improvements noted in 1Q15 Pillar-three reports.

Capital: All focus will be on management commentary regarding the next
wave of regulation. We expect no DRP neutralisations in coming weeks.
Valuation and risks
We arrive at our valuations for the major banks using a blend of DCF, price to
earnings, price to underlying earnings and price to NTA. We set out our target
prices at a premium to our valuations to take account of the current divergence
between the bank sector yield and the 10-year bond rate.
Risks to our target prices being achieved are a faster-than-expected lift in
domestic rates and a tougher-than-expected new world regulatory outcome.
4
BANKS
April 23, 2015
LONG-TERM TRENDS
Sector analysis – absolute
Following this month’s sell-off, the bank sector
PE is still expensive relative to the long run
average
Figure 6: PE – absolute
16.0
Current: 14.5 Avg: 11.9
x
14.0
12.0
10.0
8.0
6.0
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
SOURCES: BLOOMBERG, IRESS, MORGANS
The global hunt for yield has been a large
driver of the rally in domestic banks in recent
years
Figure 7: Dividend yield – absolute
Current: 5.0% Avg: 5.5%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
SOURCES: BLOOMBERG, IRESS, MORGANS
On our underlying earnings assumptions, the
sector is trading well above one standard
deviation expensive
Figure 8: Price to underlying EPS – absolute
10.0
Current: 9.2 Avg: 7.1
x
9.0
8.0
7.0
6.0
5.0
4.0
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
SOURCES: BLOOMBERG, IRESS, MORGANS
The sector is now trading at 2.8x on a P/NTA
basis, which is above the long run average of
2.6x
Figure 9: Price to NTA – absolute
4.0
Current: 2.8 Avg: 2.6
x
3.5
With additional regulatory capital requirements
likely to weigh on returns in the near term, the
sector is likely to trade below this long run
average for the foreseeable future
3.0
2.5
2.0
1.5
1.0
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
SOURCES: BLOOMBERG, IRESS, MORGANS
5
BANKS
April 23, 2015
Sector analysis – relative
Figure 10: PE vs market
On a relative basis, the bank sector PE is
trading closer to long run averages relative to
the PE for the broader S&P/ASX200
Current: 87.0% Avg: 83.8%
130%
120%
110%
100%
90%
80%
70%
60%
50%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
SOURCES: BLOOMBERG, IRESS, MORGANS
Relative to non-bank industrials (ignoring
weakness in resources stocks) the bank sector
is trading slightly below its long run average
Figure 11: PE vs non-bank industrials
Current: 82.5% Avg: 82.6%
120%
110%
100%
90%
80%
70%
60%
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
SOURCES: BLOOMBERG, IRESS, MORGANS
Compared to the 10-year bond yield, the
sector’s dividend yield is still trading over one
standard deviation cheap
This breakdown in the trend between dividend
and bond yields has been experienced across
the market
Figure 12: Sector dividend yield vs 10 year bond yield
Current: 212.1% Avg: 107.6%
260%
210%
160%
110%
60%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
SOURCES: BLOOMBERG, IRESS, MORGANS
From an earnings yield perspective, the sector
is also trading more than one standard
deviation cheap
Figure 13: Sector earnings yield vs 10-year bond yield
Current: 292.2% Avg: 163.4%
350%
300%
250%
200%
150%
100%
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
SOURCES: BLOOMBERG, IRESS, MORGANS
6
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April 23, 2015
REVIEW OF SECTOR THEMES
Volumes
RBA system lending growth in the 12 months to February 2015 was 6.2%,
comprising 7.2% for housing, 5.6% for business and 0.5% for personal. System
growth in bank deposits was 7.9% over the same period.
Figure 14: System credit growth tracking at 6.2% yoy in 12 months to Feb-15
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
77
79
81
83
85
87
89
91
Housing
93
95
Personal
97
99
01
Business
03
05
07
09
11
13
Total
SOURCES: MORGANS, RBA
Within the mortgage segment, despite very strong levels of activity, mortgage
pre-payments also remain elevated, keeping the recent recovery in overall
mortgage credit growth relatively contained. With the growth in mortgage
approvals having now peaked and APRA’s recent efforts to curb investor loan
growth, even with the expectation of further rate cuts, we expect mortgage
credit growth is likely to be peaking around current levels. The broker channel
has been key in delivering growth in recent periods, supporting MQG’s
aggressive move into the mortgage segment.
Figure 16: Mortgage finance approvals –
growth yoy (value)
Figure 15: Move in mortgage market
share (12m to Feb-15)
50%
0.4%
Title:
Source:
40%
0.3%
30%
Figure 17: Broker channel driving
growth – FY14
Title:
Source:
Please fill in the values above to have them entered in your
Please
report
fill in the values above to h
0.2%
20%
0.1%
10%
0.0%
0%
-0.1%
-10%
-0.2%
-20%
-0.3%
-30%
MQG
NAB
ANZ
Rabo
SUN
BEN
BOQ
WBC
CBA
ING
-40%
-0.4%
06
07
08
09
10
11
Owner occupied
SOURCES: MORGANS, APRA
12
13
14
15
Investor
SOURCES: MORGANS, ABS
SOURCES: CBA
While the headline improvement in business lending growth (+5.6% yoy) is
positive (particularly considering the uncertain economic backdrop), when
including activity in the corporate bond market for a more complete picture of
business credit growth, the picture is less cheerful (+3.7% yoy). Commercial
finance commitments, which are a strong lead indicator for near-term
performance in business credit growth, are now also beginning to roll over, after
a period of strong readings.
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April 23, 2015
Figure 18: Move in business lending
market share (12m to Feb-15)
Figure 19: Total business credit growth
30%
0.8%
60%
Title:
Source:
25%
0.6%
Figure 20: Commercial finance approvals
Title:
Source:
50%
40%
20%
Please fill in the values above to have them entered in your
Please
report
fill in the values above to h
0.4%
30%
15%
20%
0.2%
10%
0.0%
5%
0%
0%
-10%
10%
-0.2%
-20%
-5%
-0.4%
-30%
-10%
-40%
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Business lending
Corporate bonds
Total business credit (incl bonds)
WBC
BEN
ING
BOQ
MQG
ANZ
SUN
CBA
NAB
-0.6%
Rabo
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
SOURCES: MORGANS, APRA
3m moving avg - net
12m moving avg - net
SOURCES: MORGANS, ABS, RBA
SOURCES: MORGANS, ABS
At the system level, deposit growth continues to outstrip loan growth, although
the gap remains much narrower than in recent years. With sector funding
composition now much improved, we believe the major banks are much more
comfortable with current loan-to-deposit ratios, which has driven a
corresponding reduction in deposit competition.
Figure 21: Move in total deposits market
share (12m to Feb-15)
Figure 22: Deposit growth vs lending
90%
25%
0.5%
Figure 23: Customer deposits to loans
Title:
Source:
yoy grow th
0.4%
80%
Title:
Source:
76.6%
72.8%
20%
0.3%
71.7%
70.1%
70% to have them entered in your
Please fill in the values above
Please
report
fill in the values above to h
0.2%
15%
60%
0.1%
50%
10%
0.0%
40%
-0.1%
5%
-0.2%
30%
-0.3%
0%
CBA
MQG
WBC
BEN
Rabo
SUN
BOQ
NAB
ANZ
ING
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
-0.4%
Deposit growth - Broad money
Australian Total Lending - total
SOURCES: MORGANS, APRA
SOURCES: MORGANS, ABS
20%
ANZ
FY06
FY12
FY07
FY13
CBA
FY08
1H14
NAB
FY09
2H14
WBC
FY10
1H15
FY11
SOURCES: MORGANS, COMPANY REPORTS
Margins
We expect net interest margins to fall by an average of 4bp sequentially for the
three major banks reporting in coming weeks with risks still skewed to the
downside for sector margins.
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April 23, 2015
Figure 24: Housing loans – SVR
Figure 26: Term deposits – special rate
Figure 25: Online saver accounts
1.0%
4.0%
0.8%
3.5%
Title:
Source:
0.5%
Please fill in the values above to have them entered in your report
0.6%
3.0%
1.0%
Title:
Source:
Please fill in the values above to have them entere
0.0%
0.4%
2.5%
-0.5%
0.2%
2.0%
0.0%
-1.0%
1.5%
-0.2%
1.0%
-1.5%
-0.4%
0.5%
-0.6%
-2.0%
06
0.0%
06
07
•
08
09
10
11
12
13
14
15
SOURCES: MORGANS, RBA, IRESS
-0.8%
06
07
•08
09
10
11
12
13
14
15
SOURCES: MORGANS, RBA, IRESS
07
•
08
09
Spot
10
11
12
13
14
15
Portfolio average
SOURCES: MORGANS, RBA, IRESS
Lending competition across all segments remains well documented. While
headline mortgage spreads remain attractive, behind-the-scenes competition
remains elevated, with aggressive discounting ongoing, very competitive fixed
rate offers and further growth in the broker channel (more likely to attract
discounts). To this end, longstanding business lending pressure has increasingly
spread into mortgages over recent periods, highlighted by the decline in CBA’s
Retail Banking Services divisional NIM in 1H15.
Institutional lending spreads look to be stabilising somewhat after a two-year
decline, although this segment remains particularly competitive, fuelled by
cheap offshore liquidity. Spreads on small business lending are higher, but
remain under pressure.
On the liability side of the balance sheet we expect the picture will be more
favourable and improvements should go some way to offsetting asset pressure.
More broadly we note:
 We expect the sector will continue to benefit from the mix shift from term
deposits into more flexible (and profitable) transaction and online accounts (as
highlighted by CBA’s RBS result in 1H15).
 The improvement in term-deposit spreads has continued in recent months for
“specials” although system six- and 12-month spot spreads have stopped
improving.
 Spreads on transaction accounts and online saver products have deteriorated
however, and we would expect the contribution from hedging (replicating
portfolios) will continue to fade for the former. Despite this drag, these products
are still more profitable than term deposits, and any further mix shift will be
beneficial.
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April 23, 2015
Figure 27: Average cost of wholesale funding (CBA 1H15)
Figure 28: CBA - RBS deposit mix
100%
14%
14%
14%
13%
12%
11%
12%
11%
11%
10%
11%
12%
46%
47%
48%
51%
51%
52%
53%
52%
50%
47%
45%
48%
18%
19%
15%
15%
15%
18%
18%
21%
19%
18%
24%
18%
20%
19%
19%
22%
20%
22%
22%
24%
25%
17%
11%
80%
60%
40%
23%
41%
21%
20%
14%
27%
0%
1H09
On-line
SOURCES: CBA
1H10
1H11
Savings deposits
1H12
Term deposits
1H13
1H14
1H15
Transaction accounts
SOURCES: MORGANS, COMPANY REPORTS
 Wholesale funding spreads have remained stable at low levels over the past six
months, although with limited asset growth wholesale balances have remained
flat and lower rates will take some time to work through the book. We expect a
small benefit to group margins in 1H15 for the sector.
Finally we expect free-fund earnings will remain under pressure despite ongoing
capital build. The squeeze on free-fund earnings in the low-rate environment
has been a headwind in recent periods. We believe the best general indicator of
investment income on these funds is the three-year bond yield, as the term for
free funds investment is in the two- to five-year term range. With the rapid
flattening of the curve experienced in recent months, both the spot and rolling
outcome here will be negative for the sector.
Non-interest income
Trading income / markets
We expect trading income results to improve in upcoming 1H15 results. There is
typically some seasonal weakness in second half performance, and we expect the
uplift in volatility from late 2014 (following a number of months of historically
low market volatility) will drive a lift in client activity. Balance sheet, or treasury
income may display some volatility given the rapid change in market cash rate
estimates earlier in the year, and broader curve flattening.
CBA spoke to a number of these trends in its recent 1H15 result. Trading income
rebounded 24% on the prior period with strong sales and trading results within
the Markets business, and a positive counterparty fair value adjustment (CVA)
mark. We note WBC’s recent derivative accounting change will weigh on the
group’s trading result in 1H15, with a one-off A$125m pre-tax revenue impact
expected.
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April 23, 2015
Figure 30: CVA – impact on earnings in recent periods
Figure 29: CBA net trading income (A$m)
100
A$m
75
50
25
0
n/a
-25
-50
-75
ANZ
CBA
1H13
2H13
NAB
1H14
SOURCES: MORGANS, APRA, RBA, COMPANY REPORTS
2H14
WBC
1H15
SOURCES: MORGANS, COMPANY REPORTS
Wealth
Wealth performance should be reasonably solid. Relative to 2H14, equity
markets have risen strongly in 2015 while equity inflows have also been strong
in the half. This suggests that earnings in the funds management arm of the
banks’ wealth management units should be solid.
In life insurance, we expect the market has bottomed, but the turnaround could
be gradual, and we think the ‘irrational oligopoly’ structure of the life insurance
sector dampens the scope for a quick return to profitability. NAB and ANZ both
flagged at their recent 1Q15 trading updates that their Wealth divisions had
benefitted from stable claims and lapses. This suggests there is little or no extra
reserving likely in 1H15.
Figure 31: Life insurance – experience results (A$m)
40
20
0
-20
-40
-60
-80
-100
-120
ANZ
CBA
1H11
2H11
1H12
NAB
2H12
1H13
AMP
2H13
1H14
2H14
SUN
1H15
SOURCES: MORGANS, COMPANY REPORTS
Expenses
The prospect of a structural slowdown in revenue growth increases the reliance
on efficiency gains to grow earnings. However, this coincides with the need for
greater investment in IT to ‘stay in business’. To this end, much of this IT spend
will be deferred and capitalised on the balance sheet, and deferred software
balances are still rising across the sector (we note NAB’s 2H14 result was
flattered by software writedowns). The resulting increase in software
amortisation is now becoming a much larger headwind for the sector.
11
BANKS
April 23, 2015
We think the banks' main challenge on cost management is to find enough
productivity gains to offset the growth in IT amortisation. This is a difficult task
considering greater compliance and regulatory costs associated with seemingly
never ending ‘new world’ regulatory burden, inflation-related salary increases
and less easy gains on staffing (Figure 35).
Figure 32: Deferred software balance
Figure 33: Software amortisation charge
300
2500
A$m
Figure 34: Average FTEs, 1H11=100
110
A$m
Title:
Source:
250
Title:
Source:
105
2000
Please fill in the values above to have them entered in your
Please
report
fill in the values above to h
200
100
1500
150
95
100
90
50
85
1000
500
0
0
ANZ
1H07
1H10
1H13
2H07
2H10
2H13
CBA
1H08
1H11
1H14
NAB
2H08
2H11
2H14
WBC
1H09
1H12
1H15
2H09
2H12
SOURCES: MORGANS, COMPANY REPORTS
1H07
1H10
1H13
ANZ
2H07
2H10
2H13
CBA
1H08
1H11
1H14
NAB
2H08
1H09
2H11
1H12
2H14
1H15
WBC
2H09
2H12
SOURCES: MORGANS, COMPANY REPORTS
80
1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15
ANZ
CBA
NAB
WBC
SOURCES: MORGANS, COMPANY REPORTS
At ANZ and NAB, much of the scope to reduce expenses lies in the offshore
units. In 2H14, the cost-to-income ratio in NAB's UK Banking unit and ANZ's
Asia Pacific Europe and America regions was excessive at 70.8% and 56.0%,
respectively. WBC's group 2H14 cost-to-income ratio of 42.0% is the lowest of
the big four banks and it has less potential for easy cost gains than peers, in our
view. WBC has recently outlined plans for a 'phase II' IT investment strategy to
follow the 'phase I' investment over FY09-14, which included the strategic
investment priorities (SIPs). Phase II will aim to refresh the bank's key
processing systems to build on the Phase I investments on front-end customer
facing systems, which is likely to keep pressure on costs, and see the deferred
software balance creep higher.
Asset quality
We expect another solid asset-quality result in 1H15, with ANZ, NAB and WBC
likely to print a bad-debt charge below the market’s assessment of mid-cycle
bad debts. To this end we expect the bad-debt charge to total loans ratio to rise
2bps on average in 1H15 compared to 2H14, and remain below banks’ FY06-12
average (the incurred loss basis provisioning period).
Gross impaired assets were on average down 12% for ANZ, NAB and WBC in
1Q15 on 2H14 levels, though this was largely driven by a strong outcome at NAB
(which was driven by UK CRE runoff) with flat outcomes at ANZ and WBC. In
1H15 CBA’s ratio of impaired assets/non-housing loans continued to fall (albeit
at a slower rate, and the level of new impaired loans also continued to decline).
However, with a number of key industries subject to structural change, we
remain cautious and will look to monitor outlook statements and watchlist
trends for any early warning sign of asset-quality deterioration. Low interest
rates and only modest rises in the unemployment rate suggest retail and
credit-card arrears should be well contained in 1H15.
12
BANKS
April 23, 2015
Figure 35: Gross impaired assets/non-housing loans
Figure 36: New & increased impaired assets/non-housing loans
4.0%
3.0%
Title:
Source:
3.5%
2.5%
Please fill in the values above to have them entered in your report
3.0%
2.0%
2.5%
2.0%
1.5%
1.78%
1.56%
1.18%
1.09%
1.5%
1.21%
1.14%
0.93%
1.0%
0.66%
1.0%
0.5%
0.5%
0.0%
0.0%
ANZ
FY07
CBA
FY08
FY09
FY10
NAB
FY11
FY12
ANZ
WBC
FY13
FY14
2H10
1H15
1H11
CBA
2H11
1H12
NAB
2H12
SOURCES: MORGANS, COMPANY REPORTS
1H13
2H13
WBC
1H14
2H14
1H15
SOURCES: MORGANS, COMPANY REPORTS
The anticipated fall in impaired assets will likely tempt banks (and auditors) to
boost earnings by releasing collective provision overlays, although we expect
only minor releases, if any, and note banks will now be in preparation for new
expected loss accounting changes. CBA and WBC continue to lead peers on
provisioning coverage.
Figure 37: Bad debt charge/non-housing loans
Figure 38: Collective provision/non-housing loans
2.0%
2.0%
1.8%
1.8%
1.6%
1.6%
1.4%
1.4%
1.2%
1.2%
1.0%
1.0%
0.8%
0.8%
0.6%
Title:
Source:
Please fill in the values above to have them entered in your report
1.35%
1.29%
1.14%
1.08%
0.6%
0.41%
0.40%
0.4%
0.37%
0.35%
0.4%
0.2%
0.2%
0.0%
ANZ
FY07
FY08
CBA
FY09
FY10
NAB
FY11
FY12
FY13
0.0%
WBC
FY14
ANZ
FY07
1H15
SOURCES: MORGANS, COMPANY REPORTS
FY08
CBA
FY09
FY10
NAB
FY11
FY12
FY13
WBC
FY14
1H15
SOURCES: MORGANS, COMPANY REPORTS
Capital / regulation
CBA’s Basel 3 common equity Tier 1 (CET1) ratio was 9.2% in 1H15, down from
9.3% in 2H14. On a post-dividend basis, CBA’s CET1 would fall to 8.60%, which
is similar to the 8.63-8.97% range of peers at their 2H14 balance dates. The
need to rebuild capital is the main reason why CBA decided not to neutralise its
1H15 dividend reinvestment plan.
13
BANKS
April 23, 2015
Figure 39: Last reported CET1 ratios
9.30%
9.20%
9.10%
9.00%
8.90%
8.80%
8.70%
8.60%
8.50%
8.40%
8.30%
9.23%
8.97%
8.79%
8.63%
ANZ
CBA
NAB
WBC
SOURCES: MORGANS, COMPANY REPORTS
After a particularly busy end to 2014, the capital and regulatory discussion has
been quieter in 2015 to date. The post report consultation period for the Murray
report / Financial Services Inquiry has now closed (March-31), and the
government will look to pass judgement on the report’s recommendations in
coming weeks. We doubt the banks will be able to block the Inquiry’s capital
proposals. It is widely expected that most recommendations will be supported
by the government; however, APRA has flagged that it is in no rush to release
new regulation.
On the two key recommendations for the bank sector (listed below) APRA has
suggested it is in no rush to launch new regulation. Given continual
developments on these issues offshore, APRA believes there is no merit in
moving ahead of international regulatory bodies, and is hoping to gain greater
colour on the international direction before implementing new regulation
domestically.

Lift core equity capital relative to global peers to >75th percentile from the
current ~60th percentile; and

Increase capital against their mortgage books to 25-30% of exposures from
the current 14-19%.
Mortgage capital requirements
Murray’s desire to lift mortgage capital is not an Australian-centric issue, and
the degree of international momentum behind this issue suggests changes are
inevitable, and may be introduced before APRA gives more guidance as to
broader group target CET1 ratios.
The Basel committee has flagged concern over inconsistencies and not enough
conservatism amongst Advanced-IRB bank mortgage capital calculations
globally. To this end, at the G20 the BSBC stressed it will aim to improve these
issues, and will release a Consultation Paper in mid-2015, and final
recommendations from the assessment are expected by end-2015.
While the report does not recommend a preferred method to boost mortgage
RWA, the three most likely options APRA will review in lifting mortgage RWAs
will be floors, the correlation factor, and it may look to align its more relaxed
treatment of investor loans with the Basel standard. Moving to a 27.5% risk
weight for mortgages, and assuming a 10.00% headline CET1, would equate to
an increased CET1 in the 0.80- 1.7% range.
Capital targets
Murray’s recommendation regarding broader group target capital ratios
supports our view that Australia’s banks will be more closely tied to the global
trend to increase capital levels. In our view, global bank capital levels will keep
rising, and Australian banks will be dragged higher.
We expect that major bank target CET1 ratios will ultimately settle in the 10-11%
range, regardless of whether APRA looks to drive this increase through a larger
D-SIB buffer, tougher leverage ratio requirement or more stringent TLAC (total
loss absorbing capacity) requirements.
14
BANKS
April 23, 2015
Near-term impact
We expect seemingly never ending regulation will result in a prolonged period
of capital build for the sector, diminishing any hopes of near-term capital
management. That said, as highlighted above, APRA is unlikely to enact new
regulation for some time, and new requirements will be met with very
reasonable implementation timeframes. While the headline capital shortfall will
be material for the sector (potentially upwards of A$10bn for each bank),
organic capital generation and dividend settings (underwritten DRPs) are likely
to be sufficient, and the market’s original concern of imminent capital raisings
have eased.
15
BANKS
April 23, 2015
1H15 REPORTING SEASON GUIDE
Key reporting season themes

Volumes: ANZ has outperformed peers in total lending, driven by a solid
performance across all consumer segments. NAB has added most share in
household deposits while WBC outperformed in business deposits in 1H15.

Margins: We expect a -4bp fall hoh in 1H15 as pressure on mortgage &
corporate spreads and free funds are almost offset by gains on funding
costs.

Trading income: After a weak 2H14, trends were improved in 1Q15,
which we expect carried over to 2Q15 on a lift in financial market volatility.
Treasury earnings are difficult to judge given considerable movement in
the domestic curve through the period.

Wealth: Improved inflows and higher equities markets should help funds
management. Pressure should remain on fees and we expect the worst has
passed for life insurance.

Costs: We expect productivity programmes and progress on IT
investment to be under the microscope. Some further gains are likely from
staffing, although IT amortisation headwinds will continue to increase.

Bad debts: We expect another benign bad-debts outcome, consistent
with further improvements noted in 1Q15 Pillar-three reports.

Capital: All focus will be on management commentary regarding the next
wave of regulation. We expect no DRP neutralisations in coming weeks.
We highlight our expectations and result day focus for each bank in the
following pages.
16
BANKS
April 23, 2015
Figure 40: 1H15 results cheat sheet (A$m)
1H14A
Summary profit and loss
Average interest earnings assets
Net interest margin
Net interest income
Non-interest income
Total revenue
Operating expenses
Underlying earnings
Bad debt expense
Pre-tax earnings
Tax expense
OEIs
Preference dividends
Cash earnings
Non-cash adjustments
Reported earnings
Cash earnings per share (c) - basic
Dividends per share (c)
ANZ - May 5th
1H15F /
2H14A
1H15F
1H14A
NAB - May 7th
1H15F /
2H14A
1H14A
2H14A
WBC - May 4
1H15F
1H15F /
1H14A
1H15F /
2H14A
1H14A
2H14A
1H15F
1H15F /
1H14A
1H15F /
2H14A
632,400
2.15%
6,764
2,905
9,669
-4,286
5,383
-529
4,854
-1,333
-6
-3
3,512
-120
3,392
129.3
83.0
661,515
2.12%
7,033
2,879
9,912
-4,474
5,438
-463
4,975
-1,367
-6
-3
3,599
280
3,879
132.1
95.0
695,176
2.05%
7,114
2,984
10,097
-4,538
5,560
-486
5,074
-1,395
-6
-3
3,669
3
3,672
134.1
87.0
9.9%
-4.3%
5.2%
2.7%
4.4%
5.9%
3.3%
-8.1%
4.5%
4.7%
0.0%
0.0%
4.5%
-102.5%
8.3%
3.7%
4.8%
5.1%
-3.2%
1.1%
3.6%
1.9%
1.4%
2.2%
5.0%
2.0%
2.1%
0.0%
0.0%
2.0%
-98.9%
-5.3%
1.5%
-8.4%
707,170
1.94%
6,843
2,644
9,487
-4,456
5,031
-528
4,503
-1,263
0
-90
3,150
-294
2,856
134.1
99.0
715,993
1.93%
6,932
2,494
9,426
-5,724
3,702
-349
3,353
-1,229
0
-90
2,034
405
2,439
86.2
99.0
742,444
1.91%
7,081
2,697
9,778
-4,563
5,215
-422
4,792
-1,342
0
-90
3,360
90
3,450
140.6
104.0
5.0%
-1.4%
3.5%
2.0%
3.1%
2.4%
3.6%
-20.0%
6.4%
6.2%
n.a.
0.0%
6.7%
-130.6%
20.8%
4.9%
5.1%
3.7%
-1.0%
2.1%
8.1%
3.7%
-20.3%
40.9%
21.0%
42.9%
9.2%
n.a.
0.0%
65.2%
-77.8%
41.5%
63.1%
5.1%
635,657
2.11%
6,677
3,182
9,859
-4,065
5,794
-341
5,453
-1,643
-38
0
3,772
-150
3,622
121.3
90.0
659,003
2.06%
6,819
3,142
9,961
-4,181
5,780
-309
5,471
-1,587
-28
0
3,856
83
3,939
124.0
92.0
685,560
2.04%
6,973
3,158
10,131
-4,267
5,864
-405
5,459
-1,638
-28
0
3,793
0
3,793
121.7
93.0
7.9%
-3.2%
4.4%
-0.7%
2.8%
5.0%
1.2%
18.7%
0.1%
-0.3%
-26.3%
n.a.
0.6%
-100.0%
4.7%
0.3%
3.3%
4.0%
-1.2%
2.3%
0.5%
1.7%
2.1%
1.4%
31.0%
-0.2%
3.2%
0.0%
n.a.
-1.6%
-100.0%
-3.7%
-1.9%
1.1%
15.5%
2.01%
44.3%
27.5%
15.4%
1.99%
45.1%
27.5%
14.9%
1.95%
44.9%
27.5%
-0.7%
-0.06%
0.6%
0.0%
-0.5%
-0.03%
-0.2%
0.0%
15.1%
1.73%
47.0%
28.0%
9.4%
1.10%
60.7%
36.7%
14.9%
1.79%
46.7%
28.0%
-0.2%
0.05%
-0.3%
0.0%
5.5%
0.68%
-14.1%
-8.7%
16.5%
2.40%
41.2%
30.1%
16.3%
2.35%
42.0%
29.0%
15.6%
2.24%
42.1%
30.0%
-0.8%
-0.16%
0.9%
-0.1%
-0.7%
-0.12%
0.1%
1.0%
0.2%
1.4%
1.1%
43.6%
1.1%
1.7%
0.2%
1.1%
0.9%
42.8%
1.1%
1.5%
0.2%
1.0%
0.8%
42.3%
1.0%
1.4%
0.0%
-0.4%
-0.3%
-1.3%
-0.1%
-0.3%
0.0%
-0.1%
-0.1%
-0.5%
-0.1%
-0.1%
0.2%
2.4%
1.5%
34.8%
1.2%
2.1%
0.1%
1.8%
1.2%
35.3%
1.1%
1.8%
0.2%
1.4%
1.0%
35.3%
1.4%
1.9%
0.0%
-1.0%
-0.6%
0.5%
0.1%
-0.2%
0.0%
-0.3%
-0.2%
0.0%
0.2%
0.1%
0.1%
1.5%
0.9%
39.4%
1.4%
2.0%
0.1%
1.2%
0.8%
37.1%
1.3%
1.8%
0.1%
1.1%
0.8%
35.9%
1.3%
1.7%
0.0%
-0.4%
-0.2%
-3.4%
-0.1%
-0.3%
0.0%
-0.1%
0.0%
-1.1%
-0.1%
-0.1%
115.5%
8.3%
10.3%
64.2%
115.4%
8.8%
10.7%
71.9%
113.6%
9.0%
10.7%
64.9%
-1.8%
0.7%
0.4%
0.7%
-1.8%
0.2%
0.1%
-7.0%
121.3%
8.6%
10.8%
73.8%
118.9%
8.6%
10.8%
114.8%
118.5%
9.1%
11.2%
74.0%
-2.7%
0.5%
0.4%
0.1%
-0.4%
0.5%
0.4%
-40.9%
129.9%
8.8%
10.3%
74.2%
126.6%
9.0%
10.6%
74.2%
125.5%
9.1%
10.6%
76.4%
-4.4%
0.3%
0.3%
2.3%
-1.1%
0.1%
0.0%
2.3%
Ratio analysis
Profitability
Return on equity (cash)
Return on risk weighted assets (cash)
Cost-to-income ratio
Tax rate
Asset quality
BDDs / total loans
Impaired assets / non-housing loans
Problem loans / total loans
Individual provisions / impaired assets
Collective provisions / non-housing loans
Total provisions / non-housing loans
Balance sheet / capital
Loan / deposit ratio
Core tier 1 ratio
Tier 1 ratio
Dividend payout ratio
SOURCES: MORGANS FORECASTS, COMPANY REPORTS
17
BANKS
April 23, 2015
WBC – HOLD (TARGET PRICE A$36.80)
WBC reports on Monday, 4 May. We forecast 1H15 cash earnings growth of
0.6% on the pcp to A$3,793m (1H14A A$3,772m), cash EPS (basic) of 121.7c
(121.3c) and interim DPS of 93c (90c).
Figure 41: WBC – 1H15 result estimates
Summary profit and loss
Average interest earnings assets
Net interest margin
Net interest income
Non-interest income
Total revenue
Operating expenses
Underlying earnings
Bad debt expense
Pre-tax earnings
Tax expense
OEIs
Preference dividends
Cash earnings
Non-cash adjustments
Reported earnings
Cash earnings per share (c) - basic
Dividends per share (c)
1H14A
2H14A
1H15F
1H15F /
1H14A
1H15F /
2H14A
FY14A
FY15F
FY15F /
FY14A
635,657
2.11%
6,677
3,182
9,859
-4,065
5,794
-341
5,453
-1,643
-38
0
3,772
-150
3,622
121.3
90.0
659,003
2.06%
6,819
3,142
9,961
-4,181
5,780
-309
5,471
-1,587
-28
0
3,856
83
3,939
124.0
92.0
685,560
2.04%
6,973
3,158
10,131
-4,267
5,864
-405
5,459
-1,638
-28
0
3,793
0
3,793
121.7
93.0
7.9%
-3.2%
4.4%
-0.7%
2.8%
5.0%
1.2%
18.7%
0.1%
-0.3%
-26.3%
n.a.
0.6%
-100.0%
4.7%
0.3%
3.3%
4.0%
-1.2%
2.3%
0.5%
1.7%
2.1%
1.4%
31.0%
-0.2%
3.2%
0.0%
n.a.
-1.6%
-100.0%
-3.7%
-1.9%
1.1%
647,330
2.08%
13,496
6,324
19,820
-8,246
11,574
-650
10,924
-3,230
-66
0
7,628
-67
7,561
245.4
182.0
700,042
2.03%
14,229
6,643
20,872
-8,667
12,205
-916
11,289
-3,387
-56
0
7,846
0
7,846
251.0
189.0
8.1%
-2.5%
5.4%
5.0%
5.3%
5.1%
5.5%
41.0%
3.3%
4.8%
-15.2%
n.a.
2.9%
-100.0%
3.8%
2.3%
3.8%
SOURCES: MORGANS FORECASTS, COMPANY REPORTS
Result day focus

Accounting change weighs on 1H15 earnings: At its 1Q15 update
WBC flagged an accounting change relating to derivative valuation, which
will have a one-off negative impact of A$125m (pre-tax) on 1H15 revenues
(will reduce trading income).

Asset quality: While we expect a strong asset quality outcome from WBC,
we doubt it can repeat the 11bps/total loans result achieved in 2H14 (we
forecast 14bps of total loans in 1H15). Impaired assets were flat into 1Q15
and we note that in 2H14, write-backs of previous provisions reduced
WBC’s bad-debt charge by almost 40%. This is unsustainable in the long
term.

Capital: We expect WBC’s 1H15 CET1 ratio to be broadly flat on 2H14
levels with strong RWA growth evident in 1Q15. While business lending
growth has been reasonable for WBC, the group has implemented a new
mortgage RWA model in the period, which will weigh on capital.
Investment view
WBC has performed reasonably well into its result, currently trading at a 5%
premium to the sector, relative to its 1% long run average. We see WBC as
expensive given a weaker-than-peer earnings growth trajectory, greater
exposure to an inevitable recalibration of mortgage capital calculations (WBC
has the lowest mortgage risk weighted asset to exposures ratio in the sector),
greater exposure to developments in macroprudential policy (given its east coast
investor lending bias) and ongoing institutional pressure. We have a Hold
recommendation and A$36.80 target price. WBC is our #4 preference of the
major banks.
18
BANKS
April 23, 2015
Figure 42: WBC – financial summary
Company:
ASX code
Westpac Banking Group
WBC
Profit & loss (A$m)
Recommendation
Hold
Average IEA
Bloomberg code
WBC AU
Terminal year
FY19F
Margin (%)
Reuters code
WBC.AX
Valuation date
Mar-16
Net Interest income
Valuation
$33.42
Price target
$36.80
Upside/(downside)
Implied cash PE
Share price
No. of shares (m)
Market cap (A$m)
Year end
$38.18
3,120
119,128
Sep
FY13A
FY14A
FY15F
FY16F
FY17F
599,846
647,330
700,042
744,365
782,931
2.15
2.08
2.03
2.00
1.97
12,912
13,496
14,229
14,883
15,432
Lending fees
1,253
1,329
1,459
1,537
1,623
Non-lending fees
1,470
1,597
1,638
1,691
1,777
-3.6%
Trading income
1,069
1,017
1,145
1,224
1,293
13.8x
Wealth management income
1,521
1,731
1,847
2,038
2,250
Life insurance income
437
525
555
612
675
Other income
171
125
-1
132
138
18,833
19,820
20,872
22,116
23,190
Forecast summary
FY13A
FY14A
FY15F
FY16F
FY17F
Total income
Reported PTP (A$m)
10,227
10,924
11,289
11,922
12,338
Expenses
-7,759
-8,246
-8,667
-9,075
-9,471
6.8
3.3
5.6
3.5
Underlying Profit
11,074
11,574
12,205
13,041
13,719
6,751
7,561
7,846
8,289
8,580
Net write-offs
-1,323
-1,302
-795
-932
-1,154
212
238
245
256
262
Movement in provisions
476
652
-121
-188
-227
12.2
11.9
3.0
4.4
2.4
Underlying earnings
10,227
10,924
11,289
11,922
12,338
7,063
7,628
7,846
8,289
8,580
Taxation
-3,088
-3,230
-3,387
-3,576
-3,701
222
240
245
256
262
Minorities
-76
-66
-56
-56
-56
6.4
8.0
2.1
4.4
2.4
Preference dividends
0
0
0
0
0
357
372
390
413
430
Cash earnings
7,063
7,628
7,846
8,289
8,580
Book value per share (c)
1,504
1,559
1,658
1,739
1,826
Non-recurring items
0
NTA per share (c)
1,109
1,157
1,261
1,346
1,436
Non-cash items
174
182
189
197
202
Reported net profit
4.8
4.6
3.8
4.2
2.5
Dilutive adjustments
growth
Reported net profit (A$m)
Reported EPS (c)
growth
Cash earnings (A$m)
Cash EPS (c)
growth
Underlying EPS (c)
Dividend per share (c)
growth
7.8
Diluted shares on issue
Valuation summary
0
0
0
0
-312
-67
0
0
0
6,751
7,561
7,846
8,289
8,580
159
165
178
178
178
3,254
3,250
3,277
3,311
3,343
262
FY13A
FY14A
FY15F
FY16F
FY17F
Cash eps (c)
222
240
245
256
Price / earnings
17.2x
15.9x
15.6x
14.9x
14.6x
Cash eps growth (%)
6.4
8.0
2.1
4.4
2.4
Price / underlying earnings
10.7x
10.3x
9.8x
9.2x
8.9x
Cash eps (c) - basic
228
245
251
262
269
Price / net tangible assets
3.4x
3.3x
3.0x
2.8x
2.7x
Dividends per share (c)
174
182
189
197
202
4.6
4.8
5.0
5.2
5.3
21.9
22.4
21.2
20.6
19.8
Dividend yield (%)
ROTE (%)
Ratio analysis (%)
FY13A
FY14A
FY15F
FY16F
FY17F
Profitability
Balance sheet (A$m)
FY13A
FY14A
FY15F
FY16F
FY17F
AU housing lending
328,532
351,037
375,461
394,783
414,077
AU business lending
126,429
137,016
148,331
158,989
170,414
AU personal lending
19,183
23,202
23,422
23,705
24,134
474,144
511,255
547,214
577,478
608,625
7.8
7.0
5.5
5.4
356,880
383,130
410,077
432,757
456,098
55,585
58,470
66,319
69,560
72,959
5.2
13.4
4.9
4.9
ROE (reported)
15.2
16.3
15.8
15.7
15.3
ROE (cash)
15.9
16.4
15.8
15.7
15.3
ROTE (cash)
21.9
22.4
21.2
20.6
19.8
RORWA (cash)
2.3
2.4
2.3
2.2
2.2
NZ lending
ROA (cash)
1.0
1.0
1.0
1.0
1.0
growth
ROTA (cash)
1.0
1.1
1.0
1.0
1.0
Non-int. income / income
31.4
31.9
31.8
32.7
33.5
Cost-to-income ratio
41.2
41.6
41.5
41.0
40.8
Revenue less cost growth
-1.0
-1.0
0.2
1.2
0.5
NCO / NHL
0.76
0.66
0.37
0.40
0.47
growth
NCO / loans
0.26
0.23
0.13
0.14
0.17
Total RWA
BDD / NHL
0.48
0.33
0.42
0.48
0.57
BDD / loans
0.16
0.12
0.15
0.17
0.20
Valuation summary
Impaireds / NHL
2.03
1.19
1.12
1.10
1.09
Preferred methodology:
Problem loans / loans
1.13
0.79
0.75
0.73
0.73
Problem loans / RWA
1.98
1.38
1.31
1.28
1.28
Individ'l prov'ns / impaireds
37.9
37.1
35.9
35.9
35.9
Discounted cashflow
$40.62
10.6% cost of equity
Collective prov'ns / NHL
1.46
1.33
1.28
1.28
1.28
Price / earnings
$32.42
13.0x - 15 year adjusted historic average
Collective prov'ns / CRWA
0.99
0.93
0.90
0.90
0.90
Price / underlying earnings
$31.19
7.9x - 15 year adjusted historic average
Collective prov'ns / RWA
0.84
0.79
0.76
0.76
0.77
Price / net tangible assets
$29.44
2.1x - imputed using Gordon's Growth
Total prov'ns / NHL
2.23
1.77
1.68
1.67
1.67
Average
$33.42
Unweighted average
Total prov'ns / CRWA
1.52
1.24
1.18
1.17
1.18
Total prov'ns / RWA
1.28
1.05
1.00
1.00
1.00
Terminal growth rate
3.0%
Value of cash flows
9.1
9.0
9.2
9.5
9.7
Risk free rate (Rf)
4.0%
Value of franking credits
Tier 1 ratio
10.7
10.6
10.7
10.9
11.1
Market risk premium (Rm)
6.0%
Equity value
Total capital ratio
12.3
12.3
12.3
12.4
12.5
Equity Beta (B)
Dividend payout ratio
76.4
74.2
75.3
75.1
75.1
Ke = Rf + B * Rm
Asset quality
growth
AU customer deposits
NZ customer deposits
42,790
45,166
51,229
53,732
56,358
Other lending
10,077
13,791
17,600
17,640
18,608
36.9
27.6
0.2
5.5
24,812
32,526
41,509
41,603
43,886
539,806
583,516
631,132
664,677
700,192
8.1
8.2
5.3
5.3
331,387
359,822
379,573
401,292
growth
Other customer deposits
Total lending
Capital
Common equity Tier 1
AU lending
307,372
Blend
Ouput Input
Discounted cashflow inputs
1.1
10.6%
101,924
26,389
128,313
Shares on issue - EOP
3,158
Equity value per share
$40.62
SOURCES: MORGANS FORECASTS, COMPANY REPORTS
19
BANKS
April 23, 2015
ANZ – ADD (TARGET PRICE A$38.85)
ANZ reports on Tuesday, 5 May. We forecast 1H15 cash earnings growth of 4.5%
on the pcp to A$3,669m (1H14A A$3,512m), cash EPS (basic) of 134.1c (129.3c)
and interim DPS of 87c (83c).
Figure 43: ANZ – 1H15 result estimates (A$m)
Summary profit and loss
Average interest earnings assets
Net interest margin
Net interest income
Non-interest income
Total revenue
Operating expenses
Underlying earnings
Bad debt expense
Pre-tax earnings
Tax expense
OEIs
Preference dividends
Cash earnings
Non-cash adjustments
Reported earnings
Cash earnings per share (c) - basic
Dividends per share (c)
1H14A
2H14A
1H15F
1H15F /
1H14A
1H15F /
2H14A
FY14A
FY15F
FY15F /
FY14A
632,400
2.15%
6,764
2,905
9,669
-4,286
5,383
-529
4,854
-1,333
-6
-3
3,512
-120
3,392
129.3
83.0
661,515
2.12%
7,033
2,879
9,912
-4,474
5,438
-463
4,975
-1,367
-6
-3
3,599
280
3,879
132.1
95.0
695,176
2.05%
7,114
2,984
10,097
-4,538
5,560
-486
5,074
-1,395
-6
-3
3,669
3
3,672
134.1
87.0
9.9%
-4.3%
5.2%
2.7%
4.4%
5.9%
3.3%
-8.1%
4.5%
4.7%
0.0%
0.0%
4.5%
-102.5%
8.3%
3.7%
4.8%
5.1%
-3.2%
1.1%
3.6%
1.9%
1.4%
2.2%
5.0%
2.0%
2.1%
0.0%
0.0%
2.0%
-98.9%
-5.3%
1.5%
-8.4%
646,958
2.13%
13,797
5,784
19,581
-8,760
10,821
-992
9,829
-2,700
-12
-6
7,111
160
7,271
261.5
178.0
713,528
2.04%
14,526
6,221
20,747
-9,231
11,516
-1,041
10,475
-2,881
-12
-6
7,577
6
7,583
276.2
188.0
10.3%
-4.5%
5.3%
7.6%
6.0%
5.4%
6.4%
4.9%
6.6%
6.7%
0.0%
0.0%
6.5%
-96.3%
4.3%
5.6%
5.6%
SOURCES: MORGANS FORECASTS, COMPANY REPORTS
Result day focus

Earnings guidance: We will look to see whether ANZ choses to reinstate
earnings guidance after dropping its FY14 earnings guidance (revenue
+4-5%, expenses +2%) into FY15. For now we believe ANZ is sticking with
its FY16 target of achieving ‘above peer’ EPS growth.

Margin: In 1Q15 ANZ’s group net interest margin fell by 6bp on 2H14,
which was much weaker than peers. Much of the weakness was
attributable to one-offs relating to FX, adverse trends in Markets, and
higher liquids holdings. To this end we expect only marginal weakness in
2Q15, for the 1H15 result to be down 7bps on 1H15.

FX: ANZ has the largest foreign currency exposure of the big four banks,
with the New Zealand and Asia Pacific Europe & America regions
providing 20% and 15% of group cash NPAT, respectively. With the fall in
the average value of the AUD against the USD (and Asian currencies tied to
the USD) and NZD in 1H15, we will look at the extent to which realised
losses on FX hedges offset translation gains.
Investment view
ANZ is our preferred pick of the major banks. Within the sector ANZ offers
valuation appeal trading at a 13% discount to the sector, at levels consistent with
the GFC when ANZ’s commercial book was in melt down. We think many of the
sources of ANZ’s 1Q15 revenue weakness will be temporary, and think
management’s capacity and focus on cost management should support
underlying earnings growth in the near term. Further, we think ANZ’s asset
quality metrics have improved more than peers since the FY09-10 peak on a
number of metrics with the risk profile of the commerical book now much
improved. Recent China weakness is likely weighing on sentiment for ANZ,
although we remain optimistic that ANZ can increase returns in its Asian
business (driven by improvements to costs, margins and more broadly, an
unwind of global macroeconomic settings, which have been a headwind for the
business in recent years).
20
BANKS
April 23, 2015
Figure 44: ANZ – financial summary
Company:
ASX code
ANZ Banking Group
ANZ
Profit & loss (A$m)
Recommendation
Add
Average IEA
FY13A
FY14A
FY15F
FY16F
FY17F
576,131
646,958
713,528
760,698
799,021
2.22
2.13
2.04
1.99
1.97
12,772
13,797
14,526
15,153
15,756
Bloomberg code
ANZ AU
Terminal year
FY19F
Margin (%)
Reuters code
ANZ.AX
Valuation date
Mar-16
Net Interest income
Valuation
$35.28
Lending fees
744
779
747
796
869
Price target
$38.85
Non-lending fees
1,715
1,736
1,830
1,951
2,044
Upside/(downside)
10.2%
Trading income
1,701
Share price
$35.26
No. of shares (m)
2,766
Market cap (A$m)
97,528
Year end
Sep
Implied cash PE
13.0x
1,336
1,101
1,281
1,558
Wealth management income
524
539
559
616
679
Life insurance income
692
744
867
956
1,054
Other income
617
885
937
999
1,048
18,400
19,581
20,747
22,030
23,152
Forecast summary
FY13A
FY14A
FY15F
FY16F
FY17F
Total income
Reported PTP (A$m)
8,945
9,829
10,475
11,231
11,677
Expenses
-8,249
-8,760
-9,231
-9,571
-9,966
9.9
6.6
7.2
4.0
Underlying Profit
10,151
10,821
11,516
12,459
13,186
6,266
7,271
7,583
8,131
8,454
Net write-offs
-1,419
-1,378
-973
-1,166
-1,302
224
257
265
281
290
Movement in provisions
213
386
-68
-61
-207
9.0
14.9
3.1
6.1
3.0
Underlying earnings
8,945
9,829
10,475
11,231
11,677
6,494
7,111
7,577
8,125
8,448
-2,435
-2,700
-2,881
-3,089
-3,211
232
252
265
281
290
Minorities
-10
-12
-12
-12
-12
6.0
8.6
5.3
6.1
3.0
Preference dividends
-6
-6
-6
-6
-6
375
398
420
450
473
Cash earnings
6,494
7,111
7,577
8,125
8,448
Book value per share (c)
1,628
1,753
1,933
2,028
2,142
Non-recurring items
0
NTA per share (c)
1,348
1,465
1,647
1,744
1,861
Non-cash items
164
178
188
199
206
Reported net profit
13.1
8.5
5.6
5.9
3.5
Dilutive adjustments
growth
Reported net profit (A$m)
Reported EPS (c)
growth
Cash earnings (A$m)
Cash EPS (c)
growth
Underlying EPS (c)
Dividend per share (c)
growth
7.2
Taxation
Diluted shares on issue
Valuation summary
-42
-45
0
0
-186
205
6
6
6
6,266
7,271
7,583
8,131
8,454
224
243
254
254
254
2,897
2,919
2,953
2,979
3,004
290
FY13A
FY14A
FY15F
FY16F
FY17F
Cash eps (c)
232
252
265
281
15.2x
14.0x
13.3x
12.5x
12.2x
Cash eps growth (%)
6.0
8.6
5.3
6.1
3.0
Price / underlying earnings
9.4x
8.9x
8.4x
7.8x
7.5x
Cash eps (c) - basic
240
261
276
294
303
Price / net tangible assets
2.6x
2.4x
2.1x
2.0x
1.9x
Dividends per share (c)
164
178
188
199
206
4.7
5.0
5.3
5.6
5.8
18.8
18.7
17.7
17.4
16.9
Price / earnings
Dividend yield (%)
ROTE (%)
Ratio analysis (%)
FY13A
FY14A
FY15F
FY16F
FY17F
Profitability
Balance sheet (A$m)
FY13A
FY14A
FY15F
FY16F
FY17F
AU housing lending
194,755
209,122
225,840
237,462
249,067
AU business lending
115,660
126,041
134,750
144,433
156,310
AU personal lending
17,210
16,715
16,209
16,404
16,701
327,625
351,878
376,798
398,299
422,079
7.4
7.1
5.7
6.0
240,169
256,950
275,149
290,836
308,178
89,867
94,574
109,638
114,996
120,616
5.2
15.9
4.9
4.9
ROE (reported)
14.8
15.8
14.9
14.9
14.6
ROE (cash)
15.4
15.5
14.9
14.9
14.6
ROTE (cash)
18.8
18.7
17.7
17.4
16.9
RORWA (cash)
2.0
2.0
2.0
2.0
1.9
NZ lending
ROA (cash)
1.0
0.9
0.9
0.9
0.9
growth
ROTA (cash)
1.0
1.0
0.9
0.9
0.9
Non-int. income / income
30.6
29.5
30.0
31.2
31.9
Cost-to-income ratio
44.8
44.7
44.5
43.4
43.0
2.7
0.2
0.6
2.5
1.0
NCO / NHL
0.64
0.55
0.35
0.40
0.42
growth
NCO / loans
0.31
0.27
0.17
0.19
0.20
Total RWA
BDD / NHL
0.54
0.40
0.38
0.42
0.49
BDD / loans
0.26
0.19
0.18
0.20
0.24
Valuation summary
Impaireds / NHL
1.75
1.08
0.90
0.86
0.86
Preferred methodology:
Problem loans / loans
1.21
0.90
0.76
0.72
0.72
Problem loans / RWA
1.74
1.31
1.10
1.04
1.05
Individ'l prov'ns / impaireds
35.9
42.8
42.3
41.3
40.3
Discounted cashflow
$43.62
10.6% cost of equity
Collective prov'ns / NHL
1.23
1.08
1.02
1.01
1.00
Price / earnings
$34.29
11.7x - 15 year adjusted historic average
Collective prov'ns / CRWA
1.00
0.89
0.85
0.84
0.83
Price / underlying earnings
$31.38
6.9x - 15 year adjusted historic average
Collective prov'ns / RWA
0.85
0.76
0.72
0.71
0.71
Price / net tangible assets
$31.84
1.8x - imputed using Gordon's Growth
Total prov'ns / NHL
1.86
1.55
1.41
1.37
1.35
Average
$35.28
Unweighted average
Total prov'ns / CRWA
1.51
1.27
1.16
1.13
1.12
Total prov'ns / RWA
1.28
1.09
0.99
0.96
0.95
Terminal growth rate
3.0%
Value of cash flows
8.5
8.8
9.1
9.3
9.5
Risk free rate (Rf)
4.0%
Value of franking credits
Tier 1 ratio
10.4
10.7
10.8
10.9
11.0
Market risk premium (Rm)
6.0%
Equity value
Total capital ratio
12.2
12.7
12.5
12.6
12.6
Equity Beta (B)
Dividend payout ratio
68.4
68.1
68.1
67.8
68.0
Ke = Rf + B * Rm
Revenue less cost growth
Asset quality
Capital
Common equity Tier 1
AU lending
growth
AU customer deposits
NZ customer deposits
72,547
76,759
88,986
93,334
97,896
Other lending
70,137
79,082
96,823
97,024
102,326
12.8
22.4
0.2
5.5
growth
Other customer deposits
113,357
121,625
148,910
149,219
157,373
Total lending
487,629
525,534
583,259
610,319
645,021
7.8
11.0
4.6
5.7
361,529
403,122
421,116
447,127
339,265
Blend
Ouput Input
Discounted cashflow inputs
1.1
10.6%
98,077
23,768
121,845
Shares on issue - EOP
2,793
Equity value per share
$43.62
SOURCES: MORGANS FORECASTS, COMPANY REPORTS
21
BANKS
April 23, 2015
NAB – HOLD (TARGET PRICE A$40.90)
NAB reports on Thursday, 7 May. We forecast 1H15 cash earnings growth of
6.7%% on the pcp to A$3,360m (1H14A A$3,150m), cash EPS (basic) of 140.6c
(134.1c) and final DPS of 104c (99c).
Figure 45: NAB – 1H15 result estimates (A$m)
Summary profit and loss
Average interest earnings assets
Net interest margin
Net interest income
Non-interest income
Total revenue
Operating expenses
Underlying earnings
Bad debt expense
Pre-tax earnings
Tax expense
OEIs
Preference dividends
Cash earnings
Non-cash adjustments
Reported earnings
Cash earnings per share (c) - basic
Dividends per share (c)
1H14A
2H14A
1H15F
1H15F /
1H14A
1H15F /
2H14A
FY14A
FY15F
FY15F /
FY14A
707,170
1.94%
6,843
2,644
9,487
-4,456
5,031
-528
4,503
-1,263
0
-90
3,150
-294
2,856
134.1
99.0
715,993
1.93%
6,932
2,494
9,426
-5,724
3,702
-349
3,353
-1,229
0
-90
2,034
405
2,439
86.2
99.0
742,444
1.91%
7,081
2,697
9,778
-4,563
5,215
-422
4,792
-1,342
0
-90
3,360
90
3,450
140.6
104.0
5.0%
-1.4%
3.5%
2.0%
3.1%
2.4%
3.6%
-20.0%
6.4%
6.2%
n.a.
0.0%
6.7%
-130.6%
20.8%
4.9%
5.1%
3.7%
-1.0%
2.1%
8.1%
3.7%
-20.3%
40.9%
21.0%
42.9%
9.2%
n.a.
0.0%
65.2%
-77.8%
41.5%
63.1%
5.1%
711,582
1.94%
13,775
5,138
18,913
-10,180
8,733
-877
7,856
-2,492
0
-180
5,184
111
5,295
220.2
198.0
758,137
1.90%
14,422
5,577
19,999
-9,296
10,704
-955
9,749
-2,730
0
-180
6,839
180
7,019
284.3
210.0
6.5%
-1.7%
4.7%
8.5%
5.7%
-8.7%
22.6%
8.9%
24.1%
9.5%
n.a.
0.0%
31.9%
62.2%
32.6%
29.1%
6.1%
SOURCES: MORGANS FORECASTS, COMPANY REPORTS
Result day focus

UK redress: Since its 1Q15 update, Clydesdale has been fined by the FCA
for inadequacies in its PPI redress handling, and the UK Treasury
Committee suggested NAB needs to overhaul its interest rate swap
miss-selling redress program. While we think existing PPI provisions
should remain adequate, we see strong potential for a top up of interest
rate swap miss-selling provisions, and have catered for A$400m additional
provisions in our FY15 estimates.

UK Banking: More broadly, the UK economic recovery remains intact,
and we expect this should continue to support credit quality improvements,
a higher net interest margin and some progress on lowering UK Banking’s
cost-to-income ratio. After NAB’s commitment to selling Clydesdale, we
would expect some colour on progress to date, and would note the recent
bid for TSB at a slight premium to book value bodes well for a potential
IPO.

Asset quality: NAB’s 1Q15 bad debt charge of A$227m increased on the
4Q14 outcome (A$108m) although the 4Q14 result included the release of
economic cycle overlay (+A50m), write-backs in UK CRE (+A54m), and a
strong fall in the UK bad debt charge. To this end, the 2H14 result looks to
be the bottom for NAB, particularly as the shift to expected loss accounting
rules will limit the scope for further provision releases.
Investment view
Since new management has begun to deliver on its commitment to boost
returns for the group (largely through shedding non-core businesses), NAB has
re-rated back toward its long run average 7% discount to the sector, after
trading at a much steeper discount through much of 2014. After dealing with
low hanging fruit, to drive further rerating we think management needs to
demonstrate sustainable improvements in its core business banking franchise,
and or achieve a decent outcome on fully exiting the UK. In the near term we
remain concerned that further provisions for interest rate swap miss-selling
may weigh on performance. We have a Hold rating on NAB and it is our #3 pick
of the major banks.
22
BANKS
April 23, 2015
Figure 46: NAB – financial summary
Company:
ASX code
National Australia Bank
NAB
Profit & loss (A$m)
Recommendation
Hold
Average IEA
FY13A
FY14A
FY15F
FY16F
FY17F
661,523
711,582
758,137
806,640
847,265
2.03
1.94
1.90
1.87
1.86
13,407
13,775
14,422
15,045
15,746
Bloomberg code
NAB AU
Terminal year
FY19F
Margin (%)
Reuters code
NAB.AX
Valuation date
Mar-16
Net Interest income
Valuation
$37.15
Lending fees
969
943
972
1,036
1,094
Price target
$40.90
Non-lending fees
1,526
1,562
1,624
1,726
1,807
Share price
$37.84
No. of shares (m)
2,421
Market cap (A$m)
91,615
Year end
Sep
Upside/(downside)
8.1%
Trading income
1,094
892
1,156
1,283
1,382
Implied cash PE
13.2x
Wealth management income
1,050
1,082
1,141
1,259
1,389
Life insurance income
338
358
449
588
751
Other income
179
301
235
250
262
18,563
18,913
19,999
21,186
22,430
Forecast summary
FY13A
FY14A
FY15F
FY16F
FY17F
Total income
Reported PTP (A$m)
8,423
7,856
9,749
10,502
11,056
Expenses
-8,206
-10,180
-9,296
-9,264
-9,651
7.5
-6.7
24.1
7.7
5.3
Underlying Profit
10,357
8,733
10,704
11,922
12,779
5,355
5,295
7,019
7,562
7,960
Net write-offs
-2,138
-1,575
-1,084
-1,336
-1,597
219
214
278
295
307
Movement in provisions
204
698
128
-83
-126
27.3
-2.5
29.8
6.2
4.2
Underlying earnings
8,423
7,856
9,749
10,502
11,056
5,910
5,184
6,839
7,382
7,780
-2,325
-2,492
-2,730
-2,941
-3,096
251
217
278
295
307
Minorities
0
0
0
0
0
4.3
-13.6
28.1
6.2
4.2
Preference dividends
-188
-180
-180
-180
-180
Cash earnings
7,780
growth
Reported net profit (A$m)
Reported EPS (c)
growth
Cash earnings (A$m)
Cash EPS (c)
growth
Underlying EPS (c)
Taxation
444
371
445
488
518
5,910
5,184
6,839
7,382
Book value per share (c)
1,779
1,841
2,008
2,102
2,206
Non-recurring items
-201
-89
0
0
0
NTA per share (c)
1,454
1,515
1,690
1,787
1,895
Non-cash items
-354
200
180
180
180
190
198
210
226
236
Reported net profit
5,355
5,295
7,019
7,562
7,960
5.6
4.2
6.1
7.6
4.4
Dilutive adjustments
42
124
140
140
140
2,374
2,450
2,515
2,552
2,579
307
Dividend per share (c)
growth
Diluted shares on issue
Valuation summary
FY13A
FY14A
FY15F
FY16F
FY17F
Cash eps (c)
251
217
278
295
15.1x
17.5x
13.6x
12.8x
12.3x
Cash eps growth (%)
4.3
-13.6
28.1
6.2
4.2
Price / underlying earnings
8.5x
10.2x
8.5x
7.7x
7.3x
Cash eps (c) - basic
253
220
284
302
315
Price / net tangible assets
2.6x
2.5x
2.2x
2.1x
2.0x
Dividends per share (c)
190
198
210
226
236
5.0
5.2
5.5
6.0
6.2
18.3
14.9
17.6
17.4
17.2
Price / earnings
Dividend yield (%)
ROTE (%)
Ratio analysis (%)
FY13A
FY14A
FY15F
FY16F
FY17F
Profitability
Balance sheet (A$m)
FY13A
FY14A
FY15F
FY16F
FY17F
AU housing lending
232,251
247,312
265,543
280,299
294,572
AU business lending
151,264
151,831
162,321
173,986
186,488
AU personal lending
9,051
9,132
9,072
9,036
9,200
392,566
408,275
436,937
463,321
490,260
4.0
7.0
6.0
5.8
289,085
313,500
335,530
355,556
375,929
70,558
76,586
88,470
92,794
97,328
8.5
15.5
4.9
4.9
ROE (reported)
13.5
12.5
15.1
15.1
15.0
ROE (cash)
14.9
12.2
14.7
14.7
14.7
ROTE (cash)
18.3
14.9
17.6
17.4
17.2
RORWA (cash)
1.7
1.4
1.8
1.8
1.8
NZ lending
ROA (cash)
0.7
0.6
0.7
0.8
0.8
growth
ROTA (cash)
0.7
0.6
0.7
0.8
0.8
Non-int. income / income
27.8
27.2
27.9
29.0
29.8
Cost-to-income ratio
44.2
53.8
46.5
43.7
43.0
Revenue less cost growth
-3.3
-22.2
14.4
6.3
1.7
NCO / NHL
0.94
0.68
0.45
0.52
0.58
growth
NCO / loans
0.42
0.30
0.19
0.22
0.25
Total RWA
BDD / NHL
0.85
0.38
0.39
0.55
0.63
BDD / loans
0.38
0.16
0.17
0.23
0.27
Valuation summary
Impaireds / NHL
2.73
1.77
1.35
1.17
1.01
Preferred methodology:
Problem loans / loans
1.69
1.19
0.90
0.78
0.68
Problem loans / RWA
2.43
1.76
1.35
1.17
1.01
Individ'l prov'ns / impaireds
32.0
35.3
35.3
35.3
35.3
Discounted cashflow
$45.70
10.6% cost of equity
Collective prov'ns / NHL
1.27
1.13
1.38
1.38
1.38
Price / earnings
$35.52
11.8x - 15 year adjusted historic average
Collective prov'ns / CRWA
0.94
0.83
1.01
1.01
1.02
Price / underlying earnings
$34.22
7.0x - 15 year adjusted historic average
Collective prov'ns / RWA
0.82
0.72
0.88
0.88
0.88
Price / net tangible assets
$33.15
1.8x - imputed using Gordon's Growth
Total prov'ns / NHL
2.14
1.75
1.85
1.79
1.73
Average
$37.15
Unweighted average
Total prov'ns / CRWA
1.59
1.28
1.36
1.32
1.28
Total prov'ns / RWA
1.38
1.11
1.18
1.14
1.11
Terminal growth rate
3.0%
Value of cash flows
8.4
8.6
9.1
9.2
9.4
Risk free rate (Rf)
4.0%
Value of franking credits
Tier 1 ratio
10.4
10.8
11.1
11.2
11.2
Market risk premium (Rm)
6.0%
Equity value
Total capital ratio
11.8
12.2
12.4
12.4
12.4
Equity Beta (B)
Dividend payout ratio
75.1
89.9
73.9
74.7
74.8
Ke = Rf + B * Rm
Asset quality
growth
AU customer deposits
NZ customer deposits
67,647
74,708
86,301
90,518
94,942
Other lending
58,955
60,510
67,290
66,226
67,294
n.a.
n.a.
n.a.
n.a.
71,712
70,439
78,332
77,093
78,336
522,079
545,371
592,698
622,341
654,882
4.5
8.7
5.0
5.2
367,652
397,605
418,357
441,720
growth
Other customer deposits
Total lending
Capital
Common equity Tier 1
AU lending
362,078
Blend
Ouput Input
Discounted cashflow inputs
1.1
10.6%
87,816
23,765
111,581
Shares on issue - EOP
2,441
Equity value per share
$45.70
SOURCES: MORGANS FORECASTS, COMPANY REPORTS
23
BANKS
April 23, 2015
Figure 47: CBA – financial summary
Company:
ASX code
Commonwealth Bank of Australia
CBA
Profit & loss (A$m)
Recommendation
Hold
Average IEA
FY13A
FY14A
FY15F
FY16F
FY17F
653,673
705,498
752,184
801,507
843,551
2.13
2.14
2.10
2.05
2.01
13,944
15,091
15,816
16,438
16,925
Bloomberg code
CBA AU
Terminal year
FY19F
Margin (%)
Reuters code
CBA.AX
Valuation date
Dec-15
Net Interest income
Valuation
$76.11
Lending fees
1,053
1,083
1,056
1,094
1,145
Price target
$85.86
Non-lending fees
1,990
2,130
2,280
2,410
2,511
Upside/(downside)
-5.4%
Trading income
863
922
1,036
1,141
1,243
Implied cash PE
14.3x
Wealth management income
1,828
1,933
1,980
2,193
2,420
Life insurance income
893
1,054
996
1,086
1,197
Other income
250
188
408
312
329
20,821
22,401
23,571
24,674
25,769
Share price
No. of shares (m)
Market cap (A$m)
Year end
$90.72
1,627,593
147,655
Jun
Forecast summary
FY13A
FY14A
FY15F
FY16F
FY17F
Total income
Reported PTP (A$m)
10,729
Expenses
-9,010
-9,499
-9,778
-10,117
-10,567
Underlying Profit
11,811
12,902
13,794
14,556
15,201
Net write-offs
-1,735
-1,648
-893
-946
-1,085
653
695
-49
-215
-226
11,949
12,852
13,395
13,891
8.8
11.4
7.6
4.2
3.7
7,618
8,631
9,235
9,718
10,078
459
520
552
576
591
Movement in provisions
6.4
13.2
6.2
4.2
2.7
Underlying earnings
10,729
11,949
12,852
13,395
13,891
7,720
8,635
9,275
9,670
10,030
Taxation
-2,953
-3,250
-3,509
-3,657
-3,793
468
523
558
576
591
Minorities
-16
-19
-20
-20
-20
8.0
11.8
6.6
3.2
2.7
Preference dividends
-40
-45
-48
-48
-48
738
801
851
890
921
Cash earnings
7,720
8,635
9,275
9,670
10,030
Book value per share (c)
2,733
2,953
3,181
3,390
3,602
Non-recurring items
-124
-97
-46
0
0
NTA per share (c)
2,087
2,349
2,575
2,789
3,007
Non-cash items
22
93
6
48
48
364
401
428
442
457
Reported net profit
7,618
8,631
9,235
9,718
10,078
9.0
10.2
6.7
3.3
3.4
Dilutive adjustments
193
190
226
226
226
1,692
1,688
1,704
1,719
1,736
591
growth
Reported net profit (A$m)
Reported EPS (c)
growth
Cash earnings (A$m)
Cash EPS (c)
growth
Underlying EPS (c)
Dividend per share (c)
growth
Diluted shares on issue
Valuation summary
FY13A
FY14A
FY15F
FY16F
FY17F
Cash eps (c)
468
523
558
576
Price / earnings
19.4x
17.3x
16.3x
15.8x
15.4x
Cash eps growth (%)
8.0
11.8
6.6
3.2
2.7
Price / underlying earnings
12.3x
11.3x
10.7x
10.2x
9.9x
Cash eps (c) - basic
482
536
572
591
607
Price / net tangible assets
4.3x
3.9x
3.5x
3.3x
3.0x
Dividends per share (c)
364
401
428
442
457
4.0
4.4
4.7
4.9
5.0
24.0
23.6
23.0
21.7
20.7
Dividend yield (%)
ROTE (%)
Ratio analysis (%)
FY13A
FY14A
FY15F
FY16F
FY17F
Profitability
Balance sheet (A$m)
FY13A
FY14A
FY15F
FY16F
FY17F
AU housing lending
338,023
360,218
383,107
403,619
423,344
AU business lending
146,426
151,654
159,833
171,318
183,629
AU personal lending
18,897
19,593
19,711
19,948
20,269
503,346
531,465
562,650
594,885
627,242
5.6
5.9
5.7
5.4
404,213
431,844
464,062
490,623
517,277
52,034
59,523
66,238
69,475
72,871
14.4
11.3
4.9
4.9
ROE (reported)
17.9
18.6
18.4
17.9
17.3
ROE (cash)
18.2
18.6
18.5
17.8
17.2
ROTE (cash)
24.0
23.6
23.0
21.7
20.7
RORWA (cash)
2.4
2.6
2.6
2.6
2.5
NZ lending
ROA (cash)
1.1
1.1
1.1
1.1
1.1
growth
ROTA (cash)
1.1
1.1
1.1
1.1
1.1
Non-int. income / income
33.0
32.6
32.9
33.4
34.3
Cost-to-income ratio
43.3
42.4
41.5
41.0
41.0
5.4
2.2
2.3
1.2
0.0
NCO / NHL
0.90
0.81
0.41
0.41
0.44
growth
NCO / loans
0.31
0.28
0.14
0.14
0.15
Total RWA
BDD / NHL
0.56
0.47
0.43
0.50
0.54
BDD / loans
0.19
0.16
0.15
0.17
0.19
Valuation summary
Impaireds / NHL
2.21
1.62
1.54
1.51
1.48
Preferred methodology:
Problem loans / loans
1.15
0.94
0.87
0.85
0.84
Problem loans / RWA
1.99
1.69
1.54
1.52
1.50
Individ'l prov'ns / impaireds
37.6
33.5
33.2
33.2
33.2
Discounted cashflow
$91.86
10.6% cost of equity
Collective prov'ns / NHL
1.46
1.33
1.28
1.28
1.28
Price / earnings
$77.33
13.9x - 15 year adjusted historic average
Collective prov'ns / CRWA
1.02
0.96
1.31
1.31
1.31
Price / underlying earnings
$72.44
8.6x - 15 year adjusted historic average
Collective prov'ns / RWA
0.87
0.82
0.78
0.78
0.79
Price / net tangible assets
$62.83
2.2x - imputed using Gordon's Growth
Total prov'ns / NHL
2.29
1.87
1.79
1.78
1.77
Average
$76.11
Unweighted average
Total prov'ns / CRWA
1.60
1.35
1.83
1.82
1.82
Total prov'ns / RWA
1.36
1.16
1.09
1.09
1.09
Terminal growth rate
3.0%
Value of cash flows
8.2
9.3
9.5
10.0
10.1
Risk free rate (Rf)
4.0%
Value of franking credits
Tier 1 ratio
10.3
11.1
11.8
12.2
12.2
Market risk premium (Rm)
6.0%
Equity value
Total capital ratio
11.2
12.0
12.8
13.2
13.2
Equity Beta (B)
Dividend payout ratio
75.5
74.8
74.8
74.8
75.2
Ke = Rf + B * Rm
Revenue less cost growth
Asset quality
growth
AU customer deposits
NZ customer deposits
34,396
40,884
47,214
49,521
51,942
Other lending
13,441
17,139
21,338
21,835
22,093
27.5
24.5
2.3
1.2
15,248
15,663
17,472
17,878
18,090
568,821
608,127
650,226
686,195
722,207
6.9
6.9
5.5
5.2
337,715
365,612
386,252
407,222
growth
Other customer deposits
Total lending
Capital
Core equity tier 1 ratio
AU lending
329,158
Blend
Ouput Input
Discounted cashflow inputs
1.1
10.6%
119,700
30,708
150,408
Shares on issue - EOP
1,637
Equity value per share
$91.86
SOURCES: MORGANS FORECASTS, COMPANY REPORTS
24
BANKS
April 23, 2015
QUEENSLAND
BRISBANE - HEAD OFFICE
BRISBANE - EDWARD STREET
BRISBANE - TYNAN PARTNERS
BUNDABERG
CAIRNS
CALOUNDRA
EMERALD
GLADSTONE
GOLD COAST
IPSWICH/SPRINGFIELD
KEDRON
MACKAY
MILTON
MT GRAVATT/CAPALABA
NOOSA
REDCLIFFE
ROCKHAMPTON
SPRING HILL
SUNSHINE COAST
TOOWOOMBA
TOWNSVILLE
YEPPOON
(07) 3334 4888
(07) 3121 5677
(07) 3152 0600
(07) 4153 1050
(07) 4222 0555
(07) 5491 5422
(07) 4988 2777
(07) 4972 8000
(07) 5581 5777
(07) 3202 3995
(07) 3350 9000
(07) 4957 3033
(07) 3114 8600
(07) 3245 5466
(07) 5449 9511
(07) 3897 3999
(07) 4922 5855
(07) 3833 9333
(07) 5479 2757
(07) 4639 1277
(07) 4725 5787
(07) 4939 3021
NEW SOUTH WALES
SYDNEY
ARMIDALE
BALLINA
BALMAIN
BOWRAL
CHATSWOOD
COFFS HARBOUR
GOSFORD
HURSTVILLE
MERIMBULA
NEUTRAL BAY
NEWCASTLE
NEWPORT
(02) 8215 5055
(02) 6770 3300
(02) 6686 4144
(02) 8755 3333
(02) 4851 5515
(02) 8116 1700
(02) 6651 5700
(02) 4325 0884
(02) 9570 5755
(02) 6495 2869
(02) 8969 7500
(02) 4926 4044
(02) 9998 4200
PORT MACQUARIE
SCONE
SYDNEY – LEVEL 7 CURRENCY HOUSE
SYDNEY – LEVEL 9
SYDNEY – HUNTER STREET
SYDNEY – REYNOLDS EQUITIES
WOLLONGONG
(02) 6583 1735
(02) 6544 3144
(02) 8216 5111
(02) 8215 5000
(02) 9125 1788
(02) 9615 4500
(02) 9373 4452
(02) 4227 3022
ACT
CANBERRA
(02) 6232 4999
VICTORIA
MELBOURNE
BRIGHTON
CAMBERWELL
CARLTON
FARRER HOUSE
GEELONG
RICHMOND
SOUTH YARRA
SOUTHBANK
TRARALGON
WARRNAMBOOL
(03) 9947 4111
(03) 9519 3555
(03) 9813 2945
(03) 9066 3200
(03) 8644 5488
(03) 5222 5128
(03) 9916 4000
(03) 8762 1400
(03) 9037 9444
(03) 5176 6055
(03) 5559 1500
WESTERN AUSTRALIA
PERTH
WEST PERTH
(08) 6462 1999
(08) 6160 8700
SOUTH AUSTRALIA
ADELAIDE
NORWOOD
(08) 8464 5000
(08) 8461 2800
NORTHERN TERRITORY
DARWIN
(08) 8981 9555
TASMANIA
HOBART
(03) 6236 9000
DISCLAIMER
The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant
personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents
(“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this
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17.11.14
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