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What to watch in next May’s bank reporting season

The new month will be a nervous time for investors who have to not only deal with the threat of a seasonal sell-off but the bank reporting season.

This year’s profit season for three of the big four banks is a particularly tense period given the shocking revelations from the ongoing Banking Royal Commission and growing fears about the quality of their loan books.

If you are feeling torn between the juicy dividend payout and the risk of further share price erosion in the sector, you won’t be alone although there are a number of things you can watch for to help you make sense of how bad the situation in the sector really is.

One common thing all investors will look for (besides comments on the Royal Commission) is the rising revenue headwind buffeting banks. Citigroup thinks the positive impact from the cuts to lending rates is waning for the big banks.

Investors will be keen to see where the price war on loans is heading and potential margin compression from rising bond yields, according to Citigroup.

The first big bank we will hear from is Australia and New Zealand Banking Group (ASX: ANZ) as it will release its half year results this Tuesday. I don’t think it will be a problem for the bank to meet consensus interim cash profit estimates of around $3.46 billion but there are other more important factors to watch for.

Morgan Stanley highlights the risk of further decline in ANZ’s institutional banking business, underlying cost growth trends, including one-off expenses, and further share buybacks as some of the things it is looking out for.

National Australia Bank Ltd. (ASX: NAB) will be next up as it fronts shareholders on Thursday. Citigroup thinks it will be a messy result as the bank is undergoing a restructuring.

This means you shouldn’t be too focused on the headline figures but on the underlying numbers. On that front, Morgan Stanley believes NAB will post a decline in revenue and margin that is driven by rising costs (excluding the restructuring).

The last of the big banks to report is Westpac Banking Corp (ASX: WBC). It will release its interim profits on May 7. Given the wave of negative publicity over its alleged lax lending standards in the past compared to its peers (a charge the bank has vigorously denied), investors will be keen to receive more evidence that this issue won’t come back to bite management in the wazoo.

Click here to read more about Westpac’s woes and what it might mean for investors.

On the upside, Morgan Stanley is expecting Westpac’s margin to increase by 2 basis points and investors will be keen to hear how the bank can buck the trend.

Commonwealth Bank of Australia (ASX: CBA) is the only big bank that isn’t reporting as it has already handed in its interim results in February. Investment bank Macquarie Group Ltd (ASX: MQG) will also be reporting results this coming Friday.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Macquarie Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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