0:05

Welcome to the Fear and Greed Business interview. I'm Sean

0:08

Aylmer. National Australia Bank, last week,

0:10

delivered a 13% drop in first half

0:12

cash profit for $ 3. 55

0:14

billion. Quite a drop, but it did

0:16

come after a stellar result the previous year.

0:19

NAB went on to announce a one and a half billion dollars

0:21

share buyback, kept its dividend steady.

0:24

This week we have half year earnings from Westpac

0:26

and ANZ. We'll have a third quarter trading update

0:28

from Commonwealth Bank as well. Plenty

0:31

for investors to sink their teeth in when it comes

0:33

to the big four banks. Remember,

0:35

of course, this is general information only and you should

0:37

always seek professional advice before making investment

0:39

decisions. Carlos Cacho is the chief

0:41

economist and bank analyst at

0:43

Jarden Australia. Now Carlos, given we've got Reserve

0:46

Bank this week as well, you're going to have

0:48

a busy week.

0:50

I definitely will Sean, and then we've got the budget the week

0:52

after. So, it's a busy couple of weeks.

0:54

So, with my two hats on.

0:56

Carlos needs more money. Just putting it out

0:58

there, just putting it out there. Tell me,

1:00

what did you make of National Australia Bank's results

1:02

last week?

1:03

Look, the headline result was broadly

1:05

in line with expectations. As you said, it was

1:07

down quite a bit from last year, but we

1:09

knew that was happening. Margins have been under pressure.

1:12

We were coming off record earnings, so

1:14

it was never going to hold up at that level. The

1:16

key thing for us though was the details

1:18

were a bit better than expected and there were three

1:21

key things that really jumped out at us. First

1:23

of all, we did get confirmation that

1:25

margin pressure, while it does continue,

1:28

is easing. We're seeing competition

1:30

in both mortgages and deposits moderate,

1:32

and the guidance from NAB was that was going to continue

1:35

ahead. So, that was a positive versus market

1:37

expectations. Secondly, we

1:39

confirmed, again, that the credit outlook

1:41

remains pretty benign, bad debts coming

1:43

in less than expected, defaults,

1:46

arrears, et cetera. All the regular indicators

1:48

us bank analysts. Look out, I'm holding

1:50

up better than people feared

1:52

they would and NAB noting that things had played

1:55

out much better. And importantly what that

1:57

means is NAB is holding quite an

1:59

elevated level of provisions. So,

2:01

the money they're putting away for the rainy day, when

2:03

things go pear- shaped in the economy, around

2:06

the highest they've been since Covid

2:08

and if you exclude that the highest they've been

2:10

since the GFC, that's

2:13

given the current environment, looking like they're

2:15

probably holding a bit too much there. And

2:17

so, there's the potential ahead, potentially

2:20

in the second half or maybe in FY 25,

2:22

and they could return some of those provisions and

2:24

that can support earnings in FY 25.

2:26

And then thirdly, what we heard is that credit

2:29

growth is holding up better than expected as well. So in

2:31

particular, NAB highlighted that business

2:33

credit growth has been much more resilient than they

2:35

anticipated, and their pipeline

2:37

of new business lending is the strongest

2:40

it's ever been in the history of the bank. So, that

2:42

comment on the earnings call really gave the market

2:44

a boost of confidence in the stock and it

2:46

was a traded up strongly following

2:48

that.

2:49

I think Andrew Irvine, the CEO, said,

2:51

I think astonishing was the word he used in

2:53

terms of that. Is there a chance

2:56

that because they're doing so well on

2:58

the business lending side and National

3:00

Australia Bank being the biggest business

3:02

lender, vis-à-vis the other three banks,

3:05

that NAB's actually outperforming

3:07

on net interest margins because they're just not being

3:10

as crunched as much in the heart of their business

3:12

as let's say Commonwealth or Westpac might be because

3:14

they're mortgage banks?

3:16

Yeah, look, absolutely. We do know that the

3:18

margin for NAB's business

3:20

bank is around 3%. The margin

3:22

for their personal bank is lower,

3:24

a bit below 2%. So, it is certainly

3:27

a more accretive and higher margin business

3:29

that is a positive for them. And they have purposefully

3:32

directed their business to be growing a bit below

3:34

system in mortgages, a level that they're happy with

3:37

and doing really well in

3:39

the business bank, particularly the SME space. So

3:41

that's definitely a positive for them versus peers.

3:44

Okay. You mentioned mortgages there. The

3:46

CEO said he thought that we're

3:49

at the bottom of that cycle or the worst was

3:51

over. I can't quite remember the words he used.

3:55

The competition, the mortgage space, is

3:57

tough but some of the big banks and NAB

3:59

being an example, they're not being too aggressive

4:02

in the competition part of it.

4:04

Yeah. Look, if you compare where we are now

4:06

to where we were 12 months ago, competition has

4:08

definitely eased, front book mortgage

4:10

rates relative to the cash rate have increased

4:13

by 10 to 15

4:15

basis points. So, if you look at banks'

4:17

basic mortgage rates, they're up by more. They're up

4:19

by about 45 to 50 basis points.

4:21

At the same time, we've also had cashbacks

4:23

have largely been pulled back. So, last

4:26

year in May, June and July, we saw

4:28

most of the big banks end their cashbacks.

4:30

You do still have one from ANZ and one from the St.

4:33

George Group brands within Westpac,

4:35

but by and large cashbacks have fallen

4:37

by the wayside. So overall, we are seeing

4:39

competition moderate. The other big change we're

4:41

seeing is that we're seeing a lot less back

4:44

book discounting. Back again 12 months

4:46

ago, if you asked your bank for a discount

4:48

on your mortgage, they were pretty willing to give it to you

4:50

when you were getting offered pretty

4:52

big discounts anywhere up to 70 or 80

4:55

basis points at some stages. That's now

4:57

mostly played through. And what we're now seeing

4:59

is the rate for new customers coming in.

5:01

The front book rate is now only just

5:03

about 10 basis points above the back book

5:05

rate, which is the rate for all existing

5:07

loans. If we rewind about 18,

5:10

24 months, that was sitting more like 50

5:12

basis points. So, that's come in a long way. And

5:14

what that means is there's just less of an incremental

5:16

drag from that repricing playing through. So,

5:18

margins are still low versus history,

5:21

but they're no longer falling the way they

5:23

were.

5:23

So if I go to my bank and ask for a

5:26

cut when I come from a fixed rate

5:28

home loan to a variable rate home loan, I've

5:30

got less chance now than I did 12 months ago.

5:32

Is that what you're sort of saying?

5:33

Yeah, you're not going to get a good rate as you would've

5:35

in February last year when the banks were competing really

5:37

aggressively. They're generally still doing

5:39

pretty well by existing customers. They want

5:41

to hold onto those customers. They don't want

5:43

to have to pay up a commission

5:45

to win back a loan through

5:47

the broker channel to offset that. The other thing

5:50

we are seeing, which should be a positive over

5:52

this year, is that we're seeing the mortgage

5:54

market shift from a refi- driven market

5:56

to a purchase driven market. If the housing

5:59

market continues to pick up and volumes lift.

6:01

And that's really important because when you're refinancing,

6:03

you don't have time pressure, you're not so

6:05

focused on the service offering, really, most

6:08

borrowers are just going to be focused on the rate and how much

6:10

money they're looking to save. When you're going to

6:12

purchase a new home, that turnaround

6:14

time, that service offering that the banks can offer.

6:16

And in our view, the premium

6:19

service that NAB has, the high

6:21

quality systems, are going to mean that they

6:23

should be able to command a modest premium

6:26

versus peers in the purchase market for that reliability.

6:29

Stay with me Carlos. We'll be back in a minute. I

6:38

am speaking to Carlos Cacho, bank analyst

6:41

at Jarden Australia. Okay.

6:43

Just before we move on to the other banks, what

6:46

Andrew Irvine did say last week, and you

6:48

can put your chief economist hat on this one, he

6:50

actually said there were pockets to the economy that are doing pretty

6:53

well and he said there was an overemphasis on

6:55

the bad stuff. What do

6:57

you take from his economic point of view?

7:00

Oh, we hundred percent agree with that. My

7:02

view has probably been a bit more

7:04

optimistic on the economy versus a lot of

7:06

my economist peers. The consumer

7:08

is soft, yes, but it's really a

7:10

bifurcated outlook. We know that mortgage holders

7:12

are doing it tough, but only one third of households

7:14

have a mortgage. Older Australians,

7:17

those without mortgages who own their homes, are actually doing

7:19

pretty well. And we actually saw that last

7:21

week in the cost of living indices as well, where cost

7:23

of living for employees is

7:25

up by over 6%, but cost of

7:27

living for a retirees is up only

7:29

3%. So, it just highlights this real difference

7:32

in the experience of the economy at the moment

7:34

for different households. And if you look outside

7:36

the consumer sector, business investment

7:39

is actually looking really solid. Residential construction

7:41

is weak. We know that, it's going to slow this year,

7:43

but non- residential building is actually quite

7:46

strong. We've got a huge amount

7:48

of infrastructure going in at the public sector level,

7:50

and the government is still driving

7:52

really strong spending on

7:54

the public consumption side. So overall,

7:57

once you step away from the consumer and look at the other

7:59

sections of the economy, it's actually holding

8:01

up relatively well. And that's why we've been a bit more positive,

8:03

particularly on credit growth, where we are expecting

8:06

non- mining business investment to rise at

8:08

about 10% through to end of FY 25.

8:11

And that should see more robust business

8:13

credit growth in both the market and the banks themselves

8:16

are expecting.

8:17

Okay. Let's move on to Westpac and ANZ. What do you

8:19

think will happen with those two? They've

8:21

got their half- yearly results this

8:23

week and Commonwealth Bank's got its quarterly

8:26

results. What are you expecting?

8:28

Look, I think we're going to see some similar things come

8:31

through in terms of continued signs

8:33

of that margin drag moderating,

8:35

competition easing. Maybe a little bit

8:37

less at Westpac and ANZ than NAB. NAB's

8:41

been playing quite safe on terms of the

8:43

margin volume trade- off when it comes to mortgages.

8:46

ANZ and Westpac had been competing a little bit more

8:48

aggressively. Lower rates, cashback

8:50

still in there. So, they might not

8:52

see quite as much of an improvement. Deposits

8:55

though, we are seeing across the board deposit competition

8:57

has definitely moderated since November or

8:59

has stabilized, I should say, sorry. And so

9:02

that should still be a positive there. ANZ,

9:05

the Institutional Bank, should continue to

9:07

do well. We learned from NAB last

9:09

week that the Institutional Bank performed really strongly.

9:12

They had an ROE of 16%, which is

9:14

a great result. If

9:16

that's a signal for the broader sector, that should be a positive

9:18

for ANZ. And for Westpac, we

9:20

know that their quarterly update was quite strong on margins,

9:23

so we would expect that to come through. And then of course,

9:25

what we're going to probably see again is bad debts

9:27

coming in below expectations. The market

9:29

doesn't think of that as a high quality beat,

9:32

but it is still a beat and it is still a positive.

9:34

And I think we'll probably, again, hear from them

9:36

that capital returns or write

9:38

back to those provisions are possible. The other thing that

9:40

we're expecting is we probably get a large buyback

9:43

out of ANZ, now that the Suncorp

9:45

deal is approved, they've got a bit more certainty on the outlook,

9:47

or at least approved by the ACCC. And

9:50

we expect they're going to announce their first buyback

9:52

in two years. And with Westpac, we're expecting

9:54

they may announce a special dividend. Westpac

9:57

has a large balance of excess franking credits

9:59

and now that they can no longer do off- market buybacks,

10:02

special dividends are really the only way to return

10:04

those to shareholders.

10:05

Okay. What about share prices in, we

10:07

saw a bit of a jump after the National Australia Bank

10:09

result last week. They

10:11

are trading at multi- year highs

10:13

in the case of Commonwealth Bank, not far off total

10:16

highs. Can they keep

10:18

running?

10:19

Look, I think our expectation is that the

10:21

banks hold up relatively well.

10:24

It's hard to see material out performance

10:26

from here, but equally we don't see a catalyst

10:28

that's going to see them de- rate materially

10:30

either. We've got a neutral view on the sector,

10:33

which is relatively favorable versus

10:35

I think what a lot of the markets think with the banks.

10:37

And that's really underpinned by that favorable macro

10:39

view, where we're seeing this easing in

10:41

competition, bad debts coming in less

10:43

than expected, the potential for them to provisions

10:46

to be written back and credit growth holding up

10:48

better than feared as well. So, I think

10:50

the way we're thinking about the banks is they're probably going to perform

10:52

broadly in line with the market, maybe

10:54

a little bit better, but the

10:57

valuations certainly don't give you a

11:00

lot of upside from these levels.

11:02

Carlos, thank you for talking to Fear and Greed, good luck. However,

11:04

in the next week with budgets and reserve banks

11:06

and bank reporting. Do

11:08

you get any sleep or not?

11:10

Well, it depends on what the 18- month old decides

11:12

to give me.

11:14

Oh, wow. You've got a busy couple of weeks.

11:16

That was Carlos Cacho, bank analyst and chief

11:18

economist at Jarden Australia. This

11:20

is the Fear and Greed Business Interview. Remember, this

11:22

is general information only and you should always seek

11:24

professional advice before making investment decisions.

11:27

Join us every morning for the full episode of Fear and

11:29

Greed, daily business news for people who make

11:31

their own decisions. I'm Sean Aylmer.

11:33

Enjoy your day.