ANZ kicks off bank reporting
ANZ +1.3%: Quarterly trading update today for ANZ so light on detail, however their earnings were a slight beat to expectations driven largely by solid trading revenue and another period of low bad debts. We had the UBS banking analyst John Story in today to cover ANZ and the banks more broadly. He’s very good in terms of trends within the sector and how the market is positioning around them.
To MM, it’s all about the trends in bad debt/provisioning as we experience better economic outcomes than feared, and factored in at the banks. They’ve raised a lot of capital, buffers are at high levels, and now this starts to unwind as the realisation of a ‘soft landing’ gets priced in.
Bad debts continue to be wound back, and that will ultimately result in earnings upgrades, so although the bank stocks don’t look cheap today on current forecasts, they’re probably not bad value if you normalise for bad debts. As an example, consensus forecasts 6-month ago were forecasting a total bad debt charge in 2024 of $6.2b, which has now been wound back to $4.3b, but would be at $1.8b if conditions were strong and they were less concerned about the likelihood of bad debts arising.
While $1.8b is arguably very low for the exposure they carry, and we doubt they’ll get to this number, if they did, it would result in a ~20+% increase in earnings, and leave it trading at around 8.5x.
This should be used as an example only to illustrate how banks can drive earnings growth in the coming years, bearing in mind that consensus (sell side) analysts, still have bank earnings declining in 2024/25.
