August reporting wrap: Banks held up well in a noisy and disruptive environment

A lot has happened in Australian banking in the last 6-12 months. The Royal Commission’s final findings were released while the regulators have toyed with higher capital buffers at the same time the respective bank managements had to battle tough operating conditions.

These would normally have knocked the wind out of the banks but investor sentiment has remained relatively positive especially for the majors and we think this is due to the alignment of some positive factors including: (1) market expectations that have been set low heading into the reporting season; (2) the Coalition surprisingly winning the federal election in May, thus limiting further unproductive political bank bashing; (3) better customer borrowing capacity flowing from positive changes to APRA’s buffer and minimum floor rate when assessing loan serviceability; (4) prospects of lower interest rates in combination with a low unemployment rate that are generally supportive of a resilient banking system; (5) surprising good underlying numbers; and (6) the market’s insatiable appetite for bank yields in a low rate environment.

The resilient ones: MQG, NAB and SUN

It has been a noisy and disruptive lead-up to the August reporting season where the banks had to (and continue to) endure the reinvigorated Australian regulators’ “Big Stick” ideology. Perversely, this is reminiscent of US President Theodore Roosevelt’s foreign policy including his handling of the Perdicaris incident in 1904. The heavily fictionalised account of this event in “The Wind and the Lion” perhaps draws us to reflect in the same manner that the banks, like the lion, must remain in their place while the regulators are like the wind and will never know their place.

We are well aware of this drag on the sector and our stock preferences therefore include those that are perceived to be more resilient, namely: MQG (cash and growth story); NAB (transformation play under incoming CEO Ross McEwan); and SUN (surplus capital and potential bank sale to drive PE re-rating as a pure general insurer).