Welcome to the second episode of '4-minute Monday', a special series from Nikko AM built around ASX reporting season. Each Monday, I sit down with the team and summarise highlights of the prior week to give investors a pulse of company earnings as well as forward-looking views into upcoming results. I hope this material helps you make sense of the deluge of announcements typically associated with earnings months.

Read on or listen to my recap of week 2, where I highlight why the banks are enjoying a sugar-hit courtesy of government support programs. I also discuss why the market cheered QBE's results but punished Telstra on its outlook statement. Don't forget to hit FOLLOW on the left if you'd like to be notified of these updates each Monday and more of my wires in future.

Every reporting season delivers a surprise that the market wasn't expecting. What was it for you last week?

QBE Insurance Group (ASX: QBE) gave an extremely positive update, with much stronger gross written premiums—a continuing trend we’re seeing globally as rates harden and move higher. QBE also provided very strong assurance around the outstanding issue of business interruption insurance. Both IAG and QBE have been impacted adversely by the market worrying about business interruption insurance due to COVID-19, but QBE gave a very strong assurance that they have immaterial exposure. They also suggested that any exposure they may have is essentially covered by their reinsurance policies. So, it was quite an upbeat message with strong underlying momentum across most of the business. The market is upgrading earnings and the stock actually responded very positively on the day.

What was your take on the banking sector following CBA and NAB's results?

Commonwealth Bank (ASX: CBA) reported its full-year result and National Australia Bank (ASX: NAB) provided a brief quarterly update. The key take-outs coming out of both were quite similar: provisioning levels remain quite low (for the moment), given the high levels of government support and number of loans in deferral. But we’re not seeing bad debts coming through yet. 

This is really a short-term issue and we'd expect bad debts to increase substantially post-government support reduction; heading into 2021 and 2022. While it is a bit of a short-term sugar hit, it may provide a little extra profit for dividends, perhaps higher than what the market was expecting.

Costs remain high for both. Given the current situation, it's difficult for companies to make people redundant. Capital surprised on the upside for both CBA and NAB. The low growth wasn’t a surprise as the banks continue to deal with the COVID-19 situation. Once government support comes off, we expect to see deteriorating credit quality going forward and that's likely to reduce capital. So overall, a pretty good set of numbers from both. However, we expect things will probably deteriorate in the next six to nine months.

Were you surprised by Telstra's result?

Telstra (ASX: TLS) came in with a result that was pretty well in line with what the market was expecting. However, they provided quite a mixed outlook statement, which the market didn't like. They gave guidance around their return on invested capital for 2023, which previously was 10%, moving it back to 7.5%. This news disappointed the market and brought into question whether the dividend may be sustainable in the long term. 

While the market was really concerned EBITDA would be low up into 2021, the key driver for Telstra at the moment continues to be the mobile market and that is expected to continue for quite a long time. So, the outlook was soft for 2021, not helped by the COVID-19 provisioning and, as a result, the stock was punished severely on the day.

Get the latest reporting season insights

Throughout August, I will publish my thoughts on all the biggest news from reporting season, including a look back on the week that was, and the things to look out for in the week ahead. Hit the follow button to stay up to date.