Table of Contents
Executive Summary........................................................................... 3
Australian Banks ROE should improve to 18-20%....................................................................3
Section 1 – Key drivers of group ROE improvements .................... 5
Executive Summary – Upside from normalising ROEs .............................................................5
ROE has collapsed in recent periods ........................................................................................6
Normalising for structural and cyclical factors ........................................................................11
Section 2 – bottom-up view ........................................................... 19
Executive summary – NAB is a key beneficiary ......................................................................19
Key divisional ROE drivers ......................................................................................................19
ROE convergence creates value opportunities .......................................................................20
1. Retail ROEs are reducing ..................................................... 23
Australian retail banks to highly levered..................................................................................23
Impact from reduction in net interest income.........................................................................25
Impact from non interest income reduction............................................................................27
Impact from credit quality trends............................................................................................27
Challenging medium term outlook for retail ROE....................................................................28
2. Business Banking ROEs to improve .................................... 31
Historical ROE trends..............................................................................................................32
ROE relativities within banks...................................................................................................33
Future ROE to benefit from structural changes ......................................................................34
Benefits from asset re-pricing:................................................................................................35
Benefits from fee increases as banks exert pricing power .....................................................36
Benefits from limited ability to increase leverage ...................................................................38
Benefits from normalisation of bad debts...............................................................................39
Best way to play this thematic - total upside for this division .................................................40
3. Institutional banking ROE - key upside risk ....................... 43
Historical trends - less than exciting and getting worse..........................................................43
Future ROE to benefit from structural changes ......................................................................47
Benefits from Asset repricing .................................................................................................48
Benefits from more fees as competition lessens ...................................................................50
Normalising provision is the key benefit .................................................................................50
Who has the greatest opportunity to benefit from this?.........................................................52
Valuation and risks.......................................................................... 54
Appendix A – NZ ROE likely to show some improvement........... 57
How have NZ margins moved?...............................................................................................57
Revenue the key drag for ROAs..............................................................................................57
Leverage has increased materially ..........................................................................................59
Opportunities for ROE improvement ......................................................................................59
Appendix B – Australian Division ROE trends............................... 63
ROE of the Australian businesses (ex Institution and WM).....................................................63
Major banks generating very different returns from this segment..........................................65
Future outlook for Australian Banking ROEs ...........................................................................67
Appendix C – Detailed Review of sector ROE trends................... 69
Key drivers of the long run ROE performance ........................................................................69