Negative sentiment surrounding the reporting season is “overdone”, with banks delivering solid balance sheets and capital ratios, according to Morningstar.
In a report titled Australia and New Zealand Reporting Season Wrap, Morningstar found that despite challenging operating conditions, banks performed well during the past earnings season.
“Balance sheets are strong, capital ratios of all four banks in the top quartile of global banks. Funding and liquidity levels are sound,” the report said.
According to Morningstar, banks have acknowledged the potential for tougher capital rules – “but we estimate this will be satisfied organically and from dividend reinvestment plans”.
Across the banking sector, residential lending is growing at 6.5 per cent, business credit growth at 6.2 per cent and deposit growth at 9 per cent. Return on equity is also sitting at close to 15 per cent, the report stated.
“Concerns of deteriorating lending standards were allayed with impaired assets declining a further 2 per cent for Commonwealth Bank, 4 per cent for Westpac and 10 per cent for ANZ Bank (partially a result of selling Esanda),” it said.
Morningstar noted that of the big four banks, CBA and Westpac are most vulnerable to lower house prices, with the banks’ home loans approximately 66 per cent of their gross loans, compared to 59 per cent for NAB and 52 per cent for ANZ.
Furthermore, the report said that in terms of stocks, “the banking sector is cheap”, with all four major banks trading at 20 per cent discounts to “fair value estimates”.
More broadly, the report found that despite headwinds, the economy and earnings are “holding up”.
“Strength in residential construction produced some better-than-expected building material results, some retailers performed well in an environment of higher import prices, and banks demonstrated their resilience,” it said.
[Related: Regional banks to see increase in bad debts]