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Blog posts tagged in Banks

In forecasting the future, especially the future direction of the equity markets, one prediction is sure to come true: that all predictions will be wrong. In the final Tales of the Trenches for 2014, the Philo Listed Research team provides a view of how we expect the Australian equity markets to perform over the next twelve months. This does not involve peering into a crystal ball or gazing at tea leaves and chicken entrails, but rather is derived by analysing the ASX on a "bottom up" or stock by stock basis. Whilst recognising the limitations of all forecasts, in this week's piece we are going to run through our current view on the returns we expect Australian equity investors to enjoy over the next 12 months.

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Funds management and in particular the vertical integration of advice, administration and management has generated much debate this week, with the government's plans to wind back some of the investor protections in Labor's Future of Financial Advice (FOFA) being strangled in the senate. In this week's piece we are not going to debate the merits of requiring financial advisers to act in their clients' best interests nor conflicted payments and fee disclosures. This week we are going to have a closer look at the funds management landscape in Australia, and in particular the dominance by the largest players of this A$1.9 trillion industry.

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Since late 2011 Australian investors have seen one year term deposit rates compress from 6% to 3.2%, as bank competition for deposits continued to decline. For investors funding their retirements from the income produced by their portfolios this is clearly a concern. As the inflation rate is currently 3%, Australian investors are now practically getting a zero real return from investing in term deposits. Whilst this looks bleak, spare a thought for European retirees who are currently receiving 0.1% for short term deposits and soon face the prospect of negative yields with European Central Bank money printing! One of the key goals of the Core Equity Portfolio is to provide a sustainable (and franked) dividend yield that is higher than the ASX 200, but we are often asked about the possibility of "juicing up" the yield of the portfolio. In this piece we are going to look at the results from simply investing in the highest yielding equities at three different points in time.

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Over the last eight days we have been digesting multi-billion dollar profit results for the major trading banks and listening to bank CEOs and CFOs commenting on their profit results. In aggregate the four major banks generated $28.6 billion in cash profits over the 2014 financial year, which represented an increase of 5% on the previous year. In this piece we are going to look at the common themes arising out of the results, differentiate between the banks and hand out our reporting season awards to the stocks that comprise a large weighting in most investors' Australian equity portfolios. The large overall size of bank profits reflects that their core business of transforming savings into lending as loans to borrowers remains a very profitable task. Indeed over the past decade (inclusive of the GFC) the big four banks have generated approximately $200 billion in profits after tax.

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Assessing future prospects for the major banks is currently one of the biggest issues facing all Australian equity fund managers. Aside from employing over 200,000 Australians and touching every sector of the Australian economy, the four major banks plus the two regionals comprise 32% of the ASX100 and four of the five largest stocks listed on the ASX with a combined market value of A$400 billion. After several years of delivering strong profit and dividend growth, primarily due to the tailwind of declining bad debt charges, all bank share prices have been sold off aggressively (down -6%) over the past month. This fall can be attributed to investor concerns that the banks will face higher capital requirements post the upcoming Murray Financial System Inquiry, as well selling from foreign investors due to a sharp fall in the AUD. In this piece we are going to look at the causes of this correction and some thoughts for the future.

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Last week Philo Research went to visit ANZ Bank's Asian platform. The purpose of this visit was to consider the bank's super regional strategy in detail as this differentiates ANZ from its domestic peers. In this piece we review ANZ Bank's Asian strategy and how investors will profit from it.

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To equity fund managers term deposits (TDs) are often seen as quite boring, lacking the growth potential in both capital and income that shares offer, but also giving investors none of the unpleasant downside variability in income and capital that can come from owning shares. The investor simply receives an agreed return paid for the life of the deposit, which is then returned at the end of the term.

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Since China started to have a greater impact on the global economy and indeed the companies listed on the ASX, investors are assailed with the contradictory extreme viewpoints that either "China is going to take over the world" (supposedly good for Australia) or that "China is a house of cards that will soon fall in a heap" (supposedly bad for Australian miners). This argument has only intensified in 2014 with a weakening in the iron ore price. We view that these two outcomes are simplistic and that the truth lies somewhere in between these two viewpoints. Earlier this week Philo Research returned from an extensive trip around China meeting with companies, state owned enterprises (SOEs) and government in the provinces of Beijing, Hebei and Shandong in the north, Hunan in the central and Jiangsu/Shanghai on the coast. The purpose of the visit was to gauge the future direction of the Chinese economy and to provide a view on the outlook for Australian companies whose profits are linked to China. In this piece we will look at the key messages coming out of China for Australian investors.

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Over the last fortnight the four major banks have reported earnings of almost $13 billion dollars which resulted in some commentary in the press about banks being too profitable. Similarly one of the minor political parties suggested last week that the way to solve Australia's deficit is to tax the miners more. Whilst the banks and miners generate large profits as companies, what is ignored in much of the debate is that these profits have to be shared amongst millions of individual shareholders; for example Westpac has 3.1 billion shares outstanding. In this piece we are going to look at measures of corporate profitability for large Australian listed companies.

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Over the last fortnight investors have been digesting multi-billion dollar profit results for the major trading banks, wading through voluminous investor discussion packs whilst listening to bank CEOs and CFOs report their profit results. Indeed Westpac offered investors over 200 detailed charts in their 137 page investor presentation!

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In forecasting the future, especially the future direction of the equity markets, one prediction is sure to come true: that all predictions will be wrong.  As part of the quarterly asset allocation process, the Philo Listed Research team provides a view of how we expect the Australian equity markets to perform over the coming year. This does not involve peering into a crystal ball or gazing at tea leaves or chicken entrails, but rather is derived from analysing the ASX on a "bottom up" or stock by stock basis.  Whilst recognising the limitations of all forecasts, in this week's piece we are going to run through our current view on the returns we expect the market to provide investors over the next 12 months.

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During the months of February and August the majority of Australian listed companies reveal their profit results and most provide guidance as to how they expect their businesses to perform in the upcoming year. As the financial noise reaches a crescendo during these months, in this note we are going to run through the key themes we have seen so far after 65% of companies have reported their results.

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This week marked the end of the reporting season for Australia’s banks with the four major banks delivering a combined $27.3B in profit for the 2013 financial year. In this piece we are going to look at the common themes coming out of the results and hand out our reporting season awards.

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Term deposits (TD) are often considered relatively straightforward investments that investors believe they can effectively manage on their own.  For most people, this is choosing the highest rate from a bank they are comfortable with. Unlike stocks, the face value of a TD does not change during the life of the deposit, as there is no 'mark-to-market' or revaluations unlike other fixed income securities like bonds which trade on markets. As we saw during the GFC, even high-grade fixed income securities can experience high price volatility. TDs experience no such observable volatility. This encourages investors to treat them as passive 'set and forget' investments.

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Probably the biggest question that any Australian equity fund manager faces is what weight in a portfolio to allocate to the banks. Over the past few years, the Australian banking sector has grown to represent 32% of the ASX100 on the back of record bank profits, weakness in other sectors and a chase for yield by investors globally as monetary policy settings across Europe, Japan and the US have pushed interest rates to multi-century lows. All of this has contributed to all 4 of the Australian banks now being in the top 15 banks globally by market capitalization.

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When you look at the collection of stocks in any portfolio; it is statistically improbable that all the stocks in any portfolio at one point in time will be outperforming the benchmark. In the Core Equity Portfolio we focus on buying quality companies stocks that we believe are undervalued by the market. Consequently we accept that some stocks we own may underperform for a time, before a catalyst occurs that causes the stock to re-rate upwards. Whilst investors should primarily focus on their overall portfolio return (+15.1% in 2013!), in this piece we are going to run through the securities that are performing well in 2013 and those that are lagging.

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Reporting season for the Australian banks (excluding CBA who have a June year end) has just finished and the following themes stood out to us:

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WBC released its financial results for the first half of the 2013 financial year today. The major news was a special dividend for shareholders.

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