Last week marked the unofficial kick-off to reporting season with Tabcorp (ASX: TAH) releasing its 2017 first half results on Thursday. Against the backdrop of a highly competitive wagering industry, the group reported a slightly weaker headline result which materialised into low-digit EBITDA growth (1.7%). The group also reiterated its commitment to its proposed merger with Tatts Group (ASX: TTS) subject to regulatory, government and shareholder approvals. Importantly, the group confirmed its intention to redeem the Tabcorp Subordinated Notes (ASX: TAHHB) on the 22nd of March 2017 via a bridge financing facility. This morning National Australia Bank (ASX: NAB) released its first quarter update which further confirmed our thesis for Australian banks. In line with recent comments made in Australian Banking: A Debt Investor’s Guide, earnings growth remains poor, operational cost control is becoming difficult and asset quality continues to weaken. The group’s Common Equity Tier 1 (CET1) ratio deteriorated by 0.3% to 9.5% over Q416 reflecting the impact of the final 2016 dividend. Unless group earnings improve significantly, we continue to believe that NAB’s dividend payout ratio (together with WBC and CBA) is unsuitable for the current regulatory climate. Importantly, NAB announced they are considering issuance of a new ASX-listed Subordinated Tier 2 Capital security. Reporting Season: The week ahead: 7 February SCA Property Group (ASX: SCP) 1H17 Results 8 February Genworth Mortgage Insurance (ASX: GMA) FY16 Results 9 February AMP (ASX: AMP) FY16 Results 9 February Suncorp Group (ASX: SUN) 1H17 Results 9 February AGL Energy (ASX: AGL) 1H17 Results In an important event for banks last week the Trump administration submitted orders to agencies for repealing / modifying the Dodd-Frank Act. While this is still in its infancy any material changes (especially the Volcker rule) are expected to have a significant effect on markets and balance sheets of US Banks. The act was a crucial piece of financial reform legislation passed in 2010 in response to the financial crisis in 2008 and any loosening is likely to be credit negative for US banks and the broader global banking system.
Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2016/2017 (Monthly) Chart 3: Term Deposit Review – December
Interest Rates As was widely anticipated, the Federal Reserve left US interest rates on hold last week stating that any rate hike will be data dependent and based on the evolution of economic conditions. This was followed by the US jobs report which beat expectations and further suggests the US economy is nearing full employment. However, given the Fed has stated that “near‑term risks to the economic outlook appear roughly balanced” we expect further details regarding the Trump administration’s fiscal policy roadmap will be needed for the FOMC to raise interest rates with conviction. On Tuesday, the RBA is expected to leave interest rates on hold as well at 1.50%. While Q416 CPI figures revealed that inflation remains weak, we expect the overheated property market and record household debt to be offset any argument for rate cuts in the short term. The market shares our view with the ASX 30 Day Interbank Cash Rate Futures February 2017 contract trading at 98.510 on Friday indicating a 5% expectation of an interest rate decrease to 1.25% at the RBA Board meeting (unchanged from last week).
