Following disappointing pre-released interim results, brokers await more detail this coming Thursday.
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-Competition rising for deposits and home loans
-Brokers await more detail from results on
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As three of the four major banks will be reporting first half profits in just a few weeks, local issues driving current profitability are back in focus.
The current level of new mortgage pricing and high levels of competition are key areas of concern, according to Citi, especially as bank executives have noted the pricing of new mortgages is 'below the cost-of-capital'.
Last week Macquarie envisaged medium-term risks from margin headwinds and potential for credit quality concerns. In particular, the broker expected first half results for
On Friday, the following day, the bank pre-announced first half operating profit of
Brokers await the actual release of first half results on Thursday 20 April to fully understand the drivers behind the earnings miss.
Accumulate-rated
Despite valuation support,
The costs incurred by
The bank also announced a -
There was no full year dividend guidance, but the bank's policy is to target a payout ratio of 60-75% and CEO
Based on
This broker is not surprised by additional costs for risk and compliance following last year's management changes, while the goodwill write-down reduces the broker's target to
According to
The goodwill write-off is of little consequence according to
Given how costly breaches of anti-money laundering law have been for Commbank ((CBA)) and Westpac ((WBC)), the broker considers the investments are well spent.
On the other hand, Citi was a tad perplexed, when first to review the result on Friday last week, why an operational risk provision was raised, when the expenses look like typical bank operating costs. The broker looks forward to additional disclosure on how the provision affects ongoing bank operating costs.
Also, ahead of the full results this Thursday, Citi surmised the pre-released result miss was due to higher costs and decided to leave its negative catalyst watch open.
In the meantime, this broker left its target price unchanged, and Macquarie is yet to update its research for the pre-released results. Now, with the remaining four brokers in the FNArena database refreshing their research, the average target price falls to
Of these six brokers monitored daily by FNArena, five have Hold (or equivalent ratings) and
Outside of the daily coverage,
Morgans rating and target price change
Morgans appears to have reacted most savagely to the
However, these changes may have been largely due to a change of analyst as the new target price now approximates the average in the FNArena database and the Hold rating is largely the consensus recommendation.
While there is valuation support at higher share prices, the broker lists several reasons for caution including investor risk aversion to smaller banks during the current economic backdrop and after recent banking turmoil overseas. Moreover, execution risk and lack of clarity on the financial benefit of the digital bank transition weigh on the broker's view.
Outlook
The investment case for
While retaining its Negative recommendation and
Apart from business as usual, management has to manage the integration of
This broker, which falls outside the FNArena Broker Call and Broker Call Extra coverage, also sees a risk that costs associated with the new risk program will linger beyond the three-year timeframe.
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