The major banks experienced a difficult October, resulting in the Financials sector falling 2.8% for the month. The period saw some underwhelming full year earnings results along with unexpected increase in remediation for poor financial and investment advice provided in the past.
ANZ Banking Group: ANZ reported a 7% decline in statutory profit for 2019 to $5.95bn, with cash profit flat on 2018 at $6.47bn even as the property market recovered. The primary driver of the weakness was Australian division, which fell 10% to $3.6bn as revenue also fell 6% to $9.6bn for the year. This was specifically impacted by the cost of repaying customers for poor financial advice. In a major shock to investors the company announced a reduction in the franking attached to this dividends to just 70%. Whilst ANZ is somewhat unique in that they still have substantial offshore operations, it was not a positive sign for the sector. Once again, the dividend was maintained at the current level rather than increased, putting further pressure on the payout ratio. Of greatest concern to us, was the unexpected fall in the group’s Net Interest Margin, by 0.08% to just 1.72%, which partially explains why the recent rate cuts were not passed on in full. It’s increasingly evident that the sectors world leading returns will be reduced in the face of neo-bank competition and an increasingly active regulator. ANZ announced that the sale of its Pension and Investment division to IOOF would be going ahead but at a $125m discount to the original $975m price.
National Australia Bank: The bank reported strongly earlier in the year but announced a further provisioning for advice remediation charges. The amount was around $832m taking the total funds put aside for poor financial advice to $1.7bn. We learned during the month that AMP’s CEO has directed the business to pay out any investor who even seeks remediation, so can only assume that both the ANZ and NAB have applied a similar policy. The bank detailed the customer remediation strategy, which included NAB Advice customers who were charged Adviser Service Fees, Consumer Credit Insurance sales, non-compliant financial advice provided to NAB Wealth customers and adviser service fees charged by their own NAB Financial Planning advisers.
Orora Ltd: After forecasting a weaker 2020 during reporting season, ORA surprised the market by announcing the sale of their Fibre unit to Nippon Paper for a price of $1.72bn. The sale represented a multiple of 18x adjusted earnings which was simply too good to refuse by management and was actually higher than the multiple of the company as a whole. The sale removes all of ORA’s core paper and recycling units and increases the defensive of the company by allowing it to focus on the higher margin beverages and glass division in which it is the dominant Australian supplier. Following the transaction the burgeoning US divisions will increase to 40% of earnings, but remain under pressure from weaker manufacturing and business investment. On the positive, the US consumer remains resilient and the funds received will likely put to work in further accretive acquisitions.
Santos Ltd: The company continued its renaissance supported by a strong rally in the oil price. Yet pressures abound throughout the world and its becoming increasingly evident that the long-term trend is down. Management announced the acquisition of Conoco Phillips Northern Australian business unit for $2.2bn which includes the Darwin and Barossa projects. The company delivered 7% growth in third quarter production which resulted in sales increasing similarly to $1.03bn. Looking more closely, the Gladstone LNG project disappointed after a one month shutdown amid concern about poor performance and a lack of available inputs.
CSL Ltd: CSL is seemingly the gift that keeps on giving. The company reached another all-time high during the month on little more than a reiteration of previous forecasts (7-10% growth) by the board at their AGM. It singly handedly supported the ASX 200 as the banking sector struggled. Brokers have used recent results and surveys to increase expectations for sales of Privigen and Hizentra to 12% in FY20 and FY21. More importantly, the influenza division is on track to deliver $200m in earnings in FY20 ahead of time. At this point in time, every investor in CSL is sitting on an unrealised profit.
Platinum International Brands Fund: This value oriented fund continued its recovery, adding 4.4% for October, as investors moved away from high growth companies to profitable, real businesses. Hong Kong based Meituan Dianping, which is an Uber Eats / Grub Hub style mobile application, adding materially to returns and is now the largest holding at 5% of the portfolio. Domestic Chinese liquor producer, Kweichow Moutai, made headlines as it continued its recovery and became the world’s largest liquor maker. Drinkers everywhere are paying hundreds of dollars to get their hands on a bottle. Finally, Alphabet (Google) reached an all-time high despite reporting below consensus third quarter results. The result saw a further 20% increase in revenue to $40.5bn and the announcement of bid to purchase Fitbit for c$20bn as the company seeks to further expand their consumer reach into healthcare.