Many of our long-term clients would be aware that we have been significantly underweight in Australian banks for some time.

As much it is easy for the media to criticise the profits that banks make, many of them have not increased their profits and therefore their dividends for many years. Investors can get into what is called a “value trap” where they just look at dividends without taking into account the potential for future dividend growth and therefore share price growth.

With this in mind we recently performed one of our regular analyses of the “Big 5” banks.  We thought that we would share our findings with you.

To compare the five Australian banks based on their 31 Dec 2023 balance sheets, we like to use the following key ratios:

• Common equity tier 1 (CET1) ratio. This is the ratio of common equity tier 1 capital to risk-weighted assets. Common equity tier 1 capital is the highest quality of capital that banks hold and consists of ordinary shares, retained earnings, and other reserves. Risk-weighted assets are the total assets of the bank adjusted for their riskiness according to a standardized formula. The CET1 ratio measures the bank’s solvency or how much it can absorb losses before becoming insolvent. A higher CET1 ratio indicates higher solvency and lower financial risk. A lower CET1 ratio indicates lower solvency and higher financial risk. The minimum CET1 ratio required by the Australian Prudential Regulation Authority (APRA) is 4.5%.
• Return on equity (ROE). This is the ratio of net income to average total equity. Total equity includes common equity tier 1 capital and other forms of capital such as preference shares and hybrid securities. The ROE measures the bank’s profitability or how much it earns on its total investment in equity. A higher ROE indicates higher profitability and efficiency. A lower ROE indicates lower profitability and efficiency.
• Net interest margin (NIM). This is the ratio of net interest income to average interest-earning assets. Net interest income is the difference between interest income and interest expense. Interest-earning assets are the assets that generate interest income for the bank, such as loans, securities, and deposits with other banks. The NIM measures the bank’s profitability or how much it earns from its core lending and borrowing activities. A higher NIM indicates higher profitability and pricing power. A lower NIM indicates lower profitability and pricing pressure.

Based on these ratios, here are the rankings of the five banks as of 31 Dec 2024:

• CET1 ratio:
  • MQG: 13.5%
  • CBA: 12.7%
  • NAB: 12.3%
  • ANZ: 12.2%
  • WBC: 11.8%
• ROE:
  • MQG: 16.8%
  • CBA: 14.2%
  • ANZ: 11.9%
  • WBC: 11.6%
  • NAB: 10.8%
• NIM:
  • MQG: 2.3%
  • CBA: 2.1%
  • WBC: 2.0%
  • ANZ: 1.9%
  • NAB: 1.8%

[ MQG – Macquarie, CBA – Commonwealth, ANZ – Australia & New Zealand, WBC – Westpac, NAB – National ]

As can be seen, based on these rankings, it may be concluded that Macquarie (MQG) has the best balance sheet among the five banks in terms of solvency, profitability, and efficiency, followed by CBA, ANZ, WBC, and NAB.

In this case it confirms our view that Macquarie and CBA are the two stand-out Australian banks. Their long-term performance and strong share price growth against the other three banks would back up our analysis.

Chris & Mark @ Intech