The post-COVID economic recovery has been a boon for Australia's major banks, giving investors reason for optimism.
Although the Commonwealth Bank of Australia (ASX: CBA) was the only one of the four big banks to report full-year results in the August reporting season, all have shown strong performances in 2021 based on reporting to date.
National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), and Australia and New Zealand Banking Group Ltd (ASX: ANZ) are expected to reveal their full-year results from late October.
How have ASX bank shares performed against the market?
ASX bank shares have performed strongly in 2021. The CBA share price has climbed 22.2% over the year so far to trade above $100.
The NAB share price is up 25% over 2021 with shares now trading on par with pre-COVID levels. The ANZ share price has gained 21.6% over the same period while the Westpac share price is up almost 33%.
This compares favourably to the All Ordinaries Index (ASX: XAO), which is up 12.5% in 2021. Nonetheless, of the big four banks, only the Commonwealth Bank has seen its share price exceed heights reached in 2017, prior to the Banking Royal Commission.
Who are winners this earnings season?
All four major ASX banks are expected to report increased earnings and profit for FY21.
CBA saw net profit after tax increase more than 19% to $8.8 billion over the year to 30 June 2021. The bank reported that improved economic conditions resulted in lower loan impairments and strong operational performance.
Loan impairment expenses decreased 78% to $554 million, while business lending grew at 3x system. Combined with a strong capital position, the result allowed CBA to declare a fully franked full-year dividend of $2, bringing FY21 dividends to $3.50.
CBA took the opportunity to announce a $6 billion off-market share buyback, funded by $6.2 billion in excess capital generated through strategic divestments. The buyback will return surplus capital to shareholders, with a lower share count supporting future returns on equity.
CBA is not the only major undertaking a share buyback — ANZ announced its own $1.5 billion on-market buyback in July. The bank considered this the most prudent, fairest, and flexible method to return surplus capital to shareholders.
ANZ reported a $2.9 billion profit for the half-year ending 31 March 2021. A key driver was a net credit provision release of $491 million which came thanks to improved credit conditions. Nonetheless, the bank still had almost $4.3 billion in reserve in case conditions deteriorate.
ANZ's earnings per share (EPS) rose to 105.3 cents, up from 82.8 cents per share in the previous half. Costs were down 2% with work to digitise core processes and platforms continuing. A strong balance sheet, solid earnings, and improving conditions combined to give ANZ confidence to pay an interim dividend of 70 cents per share, fully franked, up from a final dividend of 35 cents per share in 2020.
Westpac also saw a significant increase in profits over the half-year ending 31 March 2021. In May, Westpac reported profits of $3.4 billion for the half-year, a 189% increase on the first half of 2020. The boost in profits was mainly thanks to an impairment benefit reflecting improved asset quality and a better economic outlook.
Westpac's earnings were up 256% on the prior corresponding period to $3.5 billion. Earnings per share more than tripled to 97 cents and an interim dividend of 58 cents per share was declared — Westpac did not declare a dividend for 1H20.
And the losers this earnings season?
There aren't any real losers among ASX bank shares this reporting season.
NAB grew cash earnings by 94.8% in the first half of the year, notching up a tidy $3.2 billion profit. Like the other banks, NAB has benefited from a better than expected rebound in the Australian and New Zealand economies post the initial COVID-19 downturn.
This has resulted in significantly better credit impairment outcomes than anticipated at the start of the pandemic. NAB's 1H21 credit impairment charges were a write-back of $128 million, versus a 1H20 charge of $1.16 billion. The strong half-year result and growing confidence in the economic outlook prompted NAB to declare an interim dividend of 60 cents per share, double that of the previous year.
ASX bank shareholders have enjoyed the return of dividends in FY21, with interim dividends doubling for ANZ and NAB compared to the prior corresponding period.
Westpac reinstated its interim dividend, while CBA will pay full year dividends of $3.50, up from $2.98 for FY20, but below the $4.31 paid for FY19.
Looking ahead
Australia's financial system has proven to be strong and stable over the past 18 months, supported by well-capitalised banks including the big four.
NAB says performance in the June quarter was encouraging, with cash earnings rising supported by significantly better credit impairment outcomes. NAB reported a $1.65 billion unaudited statutory net profit for the third quarter, with cash earnings up 10.3% compared to the prior corresponding period.
Continued COVID-19 outbreaks are creating uncertainty, but the bank says it remains optimistic about the long term outlook for Australia and New Zealand. Once restrictions are eased, NAB is confident the economy will bounce back.
CBA anticipates ongoing economic impacts and earnings pressure from lower interest rates, and says it is prepared for a range of different economic scenarios.
Nonetheless, its strong capital and balance sheet position means it has capacity to absorb potential stress events. This allows for the return of surplus capital to CBA shareholders via the share buyback.
ANZ has taken a similar position, citing the strength of its balance sheet and ongoing financial performance as factors facilitating its own return of capital to shareholders.
Westpac says the first half of the year has been promising, with considerably higher earnings and improved balance sheet strength. The bank said the economic outlook was more positive when it reported its half year results, but acknowledged remaining uncertainty.
As a result, Westpac has remained prudent in its impairment provisioning but expects the Australian economy to expand by 4.5% in 2021. This should support a 4.6% increase in total credit with residential lending expanding 6.5%.
