Australian macro and banking
The Australian PMI – Manufacturing print was another strong one, with most sub-components up and up strongly. The mix of remaining indicators are shown for context, but we expect them to be similarly strong when released (over the next few days).
The CoreLogic data was likewise strong. A) Australia is experiencing a housing boom as a result of low rates and little else to spend on and b) the higher the house prices, the stronger the underlying collateral value of the banking sector that wrote the loans.
The WBC result was strong, easily beating market expectations. The actual ROE was above 10%, and cash earnings were over the $3.5bn mark, above consensus of $3.43bn.
The main driver continues to be the low (in this case negative) bad and doubtful debt charges, and the ongoing write-back of prior period provisioning (as losses prove to be “less bad” than feared).
CBA and NAB will be material beneficiaries of this unwind as well.
There was something for everyone in this report, with the bulls focusing on the above asset quality comments, and the broader story of recovery, which propelled statutory (and normalised) results to triple digits (e.g. statutory NPAT was up over 200%).
We are focusing on the less than positive story associated with hardship balances, which have risen 3 months in a row.
And we are focussing on the trend of the stressed exposures, which appear to be increasing, to our mind. The market is taking the view that the next half will see stressed exposures drop meaningfully below 1.6, (e.g 1.91, 1.60, 1.40) rather than increase.
We’d suggest that valuation ratios already have that happy outcome in the price…
And given we see loan demand as unsustainable, we see more downside risk than upside risk to bank share prices, particularly after the mammoth rally we’ve just seen.
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