Although we still have one big bank which is yet to report earnings in 2014 – Westpac Banking Corp (ASX: WBC) – now is a great time for investors to take a step back and reassess the performance of their favourite bank.
Starting at the bottom, National Australia Bank Ltd (ASX: NAB) today announced a 7% cash profit increase for the first quarter of 2014. The earnings were a reflection of the increased exposure to Australian mortgages and record low bad debts more so than a continuation of its dominance in business lending. The UK assets continue to show signs of increased productivity but would, no doubt, still remain a burden many investors would rather see divested – which could likely occur in the near future.
NAB, like every one of the big banks, has been able to record a huge drop in bad and doubtful debts which is usually written off against their profit and loss. This has come about as a result of a number of important trends.
With interest rates so low and sluggish growth in the lending environment, banks are competing fiercely for market share, sometimes cutting the interest rates on mortgages by over 1%. That might sound like a feasible incentive for short-term gains, but it presents a bigger problem when interest rates inevitably rise. It will cause a rise in bad debts, hindering profit in the long term.
Now, I’m not saying banks are digging a hole for themselves, but why else is NAB’s share price trading 2% lower today? Perhaps the market was expecting higher growth from its business banking division given the bank’s high share price. Nevertheless the market wasn’t impressed and I wouldn’t be either if I paid over 14 times earnings for a stock which is facing more headwinds than tailwinds in the short-to-medium term.
Last week, Commonwealth Bank of Australia (ASX: CBA) announced its cash profit of $4.268 billion for the half-year to 31 December 2013, up 14%. It was ahead of many analysts’ expectations but, like the other banks, it benefitted from smaller amounts of bad debts. CBA’s investment in its technology capability is a significant stepping stone to long-term success. It has recognised technology will change the banking industry and is preparing itself.
In the past 20 years, the CBA has benefitted from a burgeoning property market here in Australia but, by all accounts, it seems the battle is intensifying for market share. It and Westpac have more to lose than its peers. This was evident in last year’s growth statistics, which showed both NAB and ANZ Banking Group (ASX: ANZ) outperformed in retail and business banking markets.
In fact, ANZ outperformed each of its peers across all portfolios as a proportion of increased market share. Although it’s coming off a smaller base, ANZ’s performance in domestic markets and throughout Asia helped it to an unaudited first quarter cash profit of $1.73 billion – or 13% higher than last year. It too enjoyed low levels of bad debts and acknowledged the increased competition in local markets put pressure on margins, such as its net interest margin, a key measure of banking profitability.
However not only did ANZ grow at above-peer levels in Australia and New Zealand, its ‘Super Regional Strategy’ also continued its strong performance with the International and Institutional Banking division showing the best results. Within the division the Global Markets business was a standout performer, up 5.7% on the prior period.
Since 2007 when ANZ CEO Mike Smith launched the regional expansion, he has faced intense scrutiny from analysts and rivals. However, the recent batch of results was cheerily received by the market who sent the share price sharply upwards. It has been and will likely be – once Westpac reports – the clear winner in early 2014. It has also paved the way for higher earnings in both the medium and long terms, differentiating itself from its peers.
Attention bank shareholders!
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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.