Westpac Group (WBC:ASX/WBC.NZX)
Westpac shares bucked the trend amongst its banking peers rising after revealing its half-year result for the first half of the 2023 financial year. Cash earnings came in at $4,001m which rose +22% from last year benefiting from higher interest rates and making progress to become a simpler, stronger bank with disciplined cost and margin management providing $1 billion of in cost savings.
Interim dividend came in at 70 cents per share, up +15% from last year, and a 61% payout ratio to further strengthen their balance sheet.
We welcome Westpac’s result which was in-line with market expectations and with a conservative view anticipate loan business and margins to tighten slightly given the slowdown in the housing market due to rising interest rates. We are BUY rated on Westpac as it still trades at a reasonable multiple compared to other big four banks’ forecasted to pay out a 6.5% dividend (taking a prudent approach of assuming no dividend growth from here).
Macquarie Group (MQG.ASX)
Macquarie shares were lower despite revealing another record result for the 2023 financial year, which had some mixed results within the details. Net profit after tax came in at $5,182m up +10% from last year, ahead of expectations, the result was heavily skewed toward its Commodities and Global Markets business which had its profits grew +54% and represented 51% of group earnings.
The more stable annuity-style business was mixed, Asset management earnings lower due to the disposal of assets in Macquarie Infrastructure Corporation, while Banking and Financial services rose due to improved trading conditions and higher net interest. Macquarie’s full-year dividend came in at $7.50 per share representing a conservative 56% payout ratio. Macquarie had a capital surplus of $12.6 billion and a bank CET1 Level 2 ratio of 13.7%.
We anticipate earnings over the next year will be softer than the current result, but overall maintain a positive view on the bank over the medium-term long-term and remain BUY rated, trading at about 12x future (discounted) earnings multiple and ~4% dividend which is still reasonable (given it has better long-term growth opportunities versus the big four lenders). With retained earnings and strong balance sheet to weather any uncertainty.
ANZ Group Holdings (ANZ:ASX/ANZ.NZX)
ANZ shares fared better than NAB, when it reported its half-year result on Friday. Cash earnings came in at $3,821m which rose +23% from the same corresponding period last year with solid performance across the board. ANZ lifted its dividend +9% from last year to 81cents per share on a 63% pay-out ratio.
We reiterate our BUY rating on ANZ as it still offers the best value for the price paid in the Australian banking sector. As a benefactor to elevated interest rates if the right trade-off to managing default risks can be mitigated from stringent lending criteria enforced over the recent years helping the bank maintain a sound loan portfolio and strong balance sheet. If investors can sit through the inevitable bumps as costs rise and technology implementation takes time, they ought to be rewarded relative to the other two “big four” CBA and NAB – which trades at higher valuations and offer less attractive dividends at the current juncture.
Australia
The Australian market (ASX 200, +0.8%) was up helped by risk on appetite from Wall street on the weekend, as Energy, Mining and Financials.
Lynas was the best performer up +12% after the Malaysian government granted the company an extra six months to process critical minerals at its plant – which had been causing most of the overhang the last few months. We remain BUY rated on Lynas.
US
WarnerBrothersDiscovery reported slightly pleasing results on Friday – its streaming service, which now has almost 100m subscribers, reported its first profit. CEO Zaslav put it concisely: “our US streaming business is no longer a bleeder”. The company reported a $1.1B loss as a result of restructuring charges and a slowdown in the cable business – to our mind this just highlights the importance of streaming – cable is a dying medium and it is a race to see who can scale the fastest – at 100M users we’re confident that WBD is well positioned for the future. Retaining BUY rating. We started recommending WBD at $9.00 and it now sits at $13.46. DIS, WBD, PARA in order of preference.
This quarter was pretty good
Now that most companies have reported we thought it might be worth looking at how most companies stacked up. Two charts of interest: S&P 500 earnings beats vs misses and S&P 500 earnings. The data doesn’t suggest a recession in spite of sticky inflation: in aggregate, earnings fell only 2.2%. This doesn’t feel like a “recession” to us. It suggests people keep spending, and companies keep earning. We cite Keynes – “I change my mind when the facts change, don’t you?” and here is the contradiction: credit spending is up and inflation has not retreated much, but this data is unequivocally good. We’re not going to argue with those results – it’s been good for our picks, especially banks and technology companies. And yet we still don’t see the Fed pausing or retreating – are we in a “Goldilocks situation” where the “levee breaks”?
Ancient Rome did QE
Another thing we have been thinking about: Roman currency. One of the comments Buffett made over the weekend that stuck with us was that we’ve never seen what happens when a paper reserve currency continues to be printed – we went back to history to get an idea. We went back and looked at Ancient Roman currency – the results are quite interesting. The reserve currency of the Roman Empire was the denarius (followed by the double denarius, which was created to replace the denarius once it was inflated to have almost no value). Roman Emperors needed to fund projects too – maybe a war, or a city rebuild, and they often did this via debasing their currency – the less silver in the denarius, then the more money printed. In other words: the Romans had QE, and they had inflation. The interesting thing is that the Romans had pandemics, too – plagues. And they engaged in QE. The below chart is quite instructive – the Antonine plague meant that the denarius was devalued by roughly half; but then the Cyprian plague invoked the “double denarius” and this basically marked the fall of the Roman empire. The currency became worth almost nothing and the denarius stopped being the world’s reserve currency. We’re not saying that we are in the fall of the Roman empire, but it’s interesting – nothing in history is new. It’s all happened before – even Pandemic-oriented money printing.