Compo set to hit lenders

ANZ begins ‘tough’ reporting season for big banks

ANZ this week kicks off what is likely to be a “tough” reporting season for the big banks, with customer compensation and royal commission costs set to hit lenders where it hurts.

UBS analysts have tipped sector earings per share to fall seven per cent as remediation for past misdeeds eats into revenue that was already declining.

Commonwealth Bank, which operates on a different calendar to its major rivals, in August reported a 4.7 per cent fall in cash profit to $9.4 billion – its first decline since the GFC. The story is expected to be much the same when ANZ reports its full-year results today, and when NAB and Westpac follow suit over the subsequent five days.

With the trio having already flagged about $1 billion in remediation costs, investors will watch for any clues on additional compensation costs analysts widely agree are in store for the years ahead.

“What magnitude of customer remediation charges can we expect in FY19/20?” UBS wrote in a note.

“Will these elevated charges impact the ability to pay dividends?” Shareholders have already watched ASX financials decline in value by more than 20 per cent over the past 18 months, versus a 4 per cent decline for the benchmark S&P/ ASX200 over the same period.

UBS analysts suggest remediation costs will cut FY18 revenue by 1.7 per cent which, combined with lower demand, could cut headline revenue by about 2.8 per cent.

The climate in which the banks operate is increasingly challenging.

“The risk of the current credit squeeze turning into a credit crunch is real and is rising, with the housing market now falling sharply,” UBS said.

“The banking sector is facing a period of substantial and sustained earnings pressure, which is likely to last several years.”

ANZ, which like its peers has been divesting non-core assets, has flagged $421 million in remediation and is tipped to unveil a $6.2 billion cash profit – down about 10 per cent on last year.

NAB is next to report tomorrow, with growth in business lending expected to soften blows elsewhere and contribute to a $5.6 billion profit, compared to $6.64 billion a year ago.

Westpac, which reports the following Monday, could unveil additional remediation on top of the relatively slight $235 million it has so far announced.

However, Westpac is tipped to match or slightly beat last year’s $8.06 billion profit.