Australian banks beating expectations despite competitive pressures, and more blue chips to report

Although we’re getting to the tail-end of US earnings season, there’s still a few notable companies left to report. Not to mention that we are getting deep into Australia’s reporting season. Although it never seems to stop, that’s a good thing for investors looking to see how companies in their portfolios and on their watchlists are performing. Earnings reports may even provide a few catalysts for your investment theses.

One company that we have continually heard for the past year or two is Pfizer. Given the mass Covid-19 vaccination rollout, it would not be much of a surprise to find out that in just one year vaccine revenue went from 18% to now 60% of the revenue pie. Pfizer’s earnings met expectations but their revenue figures were held down a little by its internal medicine and hospital segments. Notably, they announced that they will be supply $32 billion worth of Covid-19 shots and $22 billion worth of Paxlovid (antiviral pill to treat Covid-19) this year.

Disney also reported, where the market was impressed with the growth in subscribers in its streaming service Disney+. Disney added 11.8 million subscribers in the quarter, bringing the total to nearly 130 million. CEO Bob Chapek reaffirmed guidance for 230 to 260 million subscribers by 2024, which is impressive growth when compared to the dwindling growth Netflix is experiencing.

A few of the big Australian banks reported as well. Commonwealth Bank (ASX: CBA) flagged an additional $2 billion share buyback and lifted its interim dividend. The fully franked final dividend will be $1.75 per share, up from $1.50 per share a year ago. This was after delivering a stronger than expected first-half profit despite competitive pressures and a low rate environment. Net cash earnings increased 23% to $4.7 billion, despite the net interest margin (NIM) falling 14 basis points to 1.92% as yield curves got flatter. The market was impressed with this report, with CBA’s share price jumping over 5% after announcing these results.

NAB also smashed expectations, with cash earnings up 12% to $1.8 billion. This was due to higher volumes across housing and business lending, increased fees and commissions, and a recovery in its Markets and Treasury business. NIM declined as with all the other big four due to competitive pressures. NAB’s NIM was down 5 bps to 1.64%.

ANZ also released earnings, while also announcing that they are considering increasing the size of its previously announced $1.5 billion on-market buy-back. In good news, ANZ has finally gotten its home loan approval system up to speed with the rest of the big four banks. However, this is the bare minimum they needed to do. They may need to compete more aggressively on price to win back the customers they lost as they got fed up with the blow-out in processing times.

In economic news, everything was centred around the US CPI print. CPI came in at 7.5%, which led to the market almost fully pricing in a rate hike of 50 basis points in March. With strong economic indicators such as high GDP growth, a low unemployment rate and rising wages, the US has no need for extremely expansionary monetary policy. This is hardly a bad thing. In fact, it is an acknowledgement that the US economy is in a strong position. The Fed will just be catching up as they may have been a bit too dovish in recent months by keeping rates at historic lows.

During a parliamentary hearing last week, RBA governor Phillip Lowe maintained that he is willing to remain patient with rate rises, but left open the door to a rate rise this year. We see this being very likely, possibly in August. Interestingly, he pointed out that ‘the great resignation’ has not occurred in Australia, with the participation rate back to pre-Covid levels.

Looking ahead to what’s happening this week, there are many companies of note reporting. This includes Australian blue chips BHP, CSL, Telstra, Wesfarmers and Woodside Petroleum.

With the iron ore price coming back up to nearly $150 recently, we are hoping to see BHP post strong results. Unless you drive a Tesla, you would have felt the impacts of oil prices rising up to $90 a barrel, with people paying up to $2 a litre at the bowser. However, this is a tailwind for oil companies such as Woodside Petroleum, which should post strong results.

We will be interested in seeing how conglomerate Wesfarmers deals with supply pressures. We believe that its core businesses retain a level of pricing power and should be able to pass these costs on.

Over in the US, consumer giant Walmart is reporting. Wall Street is expecting earnings per share of $1.49 and revenue of $151.74 billion. Chipmaker NVIDIA is expected to generate revenue of $7.41 billion. We like the theme of microchip companies, particularly the likes of NVIDIA who see themselves as a supplier of companies leading future megatrends such as the metaverse and AI.

Also released this week is the print for the unemployment rate in Australia. This is expected to come in at 4.5%. Prime Minister Scott Morrison had recently stated that he believes Australia can achieve an unemployment rate that starts with a ‘3’, which will bring Australia to full employment.

Interesting Finance Fact of the Week

Ronald Wayne was the third co-founder of Apple, along with Steve Wozniak and Steve Jobs. In 1976, he sold his 10% share of the company for $800. Today, his 10% would have been worth of $35 billion.

We all know the pain of selling an investment too early, only to see it keep growing. Well spare a thought for Ronald Wayne, who missed out on a gain of 4,374,999,900%.

Have a great week,

Sam Waldron - Research Analyst

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