Bloomberg澳大利亚银行业展望2021：股市仍有小幅上涨；股息和宏观环境是进一步上涨的关键

Table of contents

Table of contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Executive Summary:Still some performance to come, inourview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Macro conditions showing signs of improvement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Mediumterm growth outlookremains very tough. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Loan deferral portfolios continue to be run down. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Rising long end rates typically signal periods ofbank outperformance. . . . . . . . . . . . . . . . . . . . . . . . .9

Banks to boost dividends in 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Domestic institutions remain underweight Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Valuations have returned to pre-COVID levels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Our order of preference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Valuation multiples back atpre-pandemic levels. . . . . . . . . . . . . . . . .14

What cost of capital are stocks pricing in?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Economic indicators signal furtherrecovery in 2021 . . . . . . . . . .19Investor positioning and the value rotation trade. . . . . . . . . . . . . . . .22

Dividends keyto 2021 performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

NIM pressure to weigh on revenue growth outlook despiteimproving loan growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Non-interest income not likelyto rebound until lateFY21/early FY22. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

COVID-19 provision coverage of deferrals has strengthened... .. .. ... .. .. .. .. ... .. .. .. ... .. .. ... .. .. .. .. ... .. .. .. ... .. .. .. ... .. .. .. ... .. .. .. ... .. .. .. ... .. ..34

WBC has the greatest potential to surprise ordisappoint 36Earnings/PT Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

ANZBanking Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Half Yearly Forecasts (FYE Sep). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Style Exp o s ure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Investment Thesis,Valuation and Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Australia&New Zealand Banking Group Limited(Overweight;Price Target:A$2620). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Price Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Co mpany Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Key Metrics (FYE Sep). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Summary Investment Thesis and Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Performance Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Commonwealth Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Key Changes (FYE Jun). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Half Yearly Forecasts (FYE Jun). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Style Exp o s ure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Investment Thesis,Valuation and Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Co mmonwealth Bank of Australia(Underweight;Price Target:A$7860). . . . . . . . . . . . . . .44

Price Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

Co mpany Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

Key Metrics (FYE Jun). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

Summary Investment Thesis and Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

Performance Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

National Australia Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

Key Changes (FYE Sep). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

Half Yearly Forecasts (FYE Sep). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

Style Exp o s ure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

Investment Thesis,Valuation and Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

National Australia Bank Limited(Overweight;Price Target:A$2650). . . . . . . . . . . . . . . . . . . . . .48

Price Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

Co mpany Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

Key Metrics (FYE Sep). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

Summary Investment Thesis and Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

Performance Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

Westpac Banking Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

Half Yearly Forecasts (FYE Sep). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

Style Exp o s ure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

Investment Thesis,Valuation and Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

Westpac Banking Corporation(Neutral;Price Target:A$2240). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

Price Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

Co mpany Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

Key Metrics (FYE Sep). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

Summary Investment Thesis and Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

Performance Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

BendigoandAdelaide Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

Key Changes (FYE Jun). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

Half Yearly Forecasts (FYE Jun). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

Style Exp o s ure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

Investment Thesis,Valuation and Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

Bendigo and Adelaide Bank(Neutral;Price Target:A$900). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

Price Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

Co mpany Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

Key Metrics (FYE Jun). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

Summary Investment Thesis and Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

Performance Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

Bankof Queensland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

Half Yearly Forecasts (FYE Aug). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

Style Exp o s ure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

Investment Thesis,Valuation and Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

Bank of Queensland Ltd(Neutral;Price Target:A$830). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

Price Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61

Co mpany Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61

Key Metrics (FYE Aug). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61

Summary Investment Thesis and Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61

Performance Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61

Executive Summary:Sti l l someperformance to come, in ourview

Having endured a torrid 2020, the banks enter 2021 with cause to be more optimistic.Economic indicators are generally firming,and rising long bond yields point to animproving outlook.That said, the recovery is expected to be uneven,and will taketime.Corporates will also have to deal with reduced levels of government support,particularly post 31-March.While non-recurrence of provision top-ups suggest apositive ST earnings outlook, the mediumterm remains challenging,with competitiveforces to drive NIM pressure and ongoing market share loss.

We forecast the majors to deliver average pre-provision profit growth this year of-7%yoy,dragged down by ANZ(Markets normalization)and WBC(revenue andcost headwinds),before improving in FY22 and FY23.On a price/pre-provisionprofit metric, the majors are back at pre-pandemic levels,with CBA and NAB bothtrading ab ove.

Figure 1:Majors price/pre-provision profit (consensus) Figure 2:Major banks average EPS growth(12mth fwd,consensus)

P/PP OP(12mt h fwd) P/PPOP(24mth fwd) FY20 (-274%) FY21 (63%) FY22(49%) FY23 (84%)Sour ce: J P Morgan estimate s, Bloomberg Finan ce L P Note : Ser ies is con structed using Sour ce: J P Mormarket estimate s for PBT, whi ch have been adjusted for impai rments Wh ere loan lossestimates are not avai lable, we have assume d perfect hindsight

CBA is trading at a~43%premiumto peers,which is above its LR average,but ismodestly below Jan-20(46%).NAB(OW)remains our preferred pick of the majorbanks,followed by ANZ(OW),WBC(N)and CBA(UW).

We see several reasons to be optimistic in 2021:

 The improving economic outlook and strong provision build in FY20 suggestscredit costs have peaked;

 Dividends are likely to return in earnest in 2021,with projected dividend yieldsof 3%to 4%,and the prospect of further capital management to beannounced/flagged later in CY21;

 ROEs have been under pressure but rates are now at the bottomof the cycle; Deposit spread improvements are helping to offset pressure fromcompetition andlower rate s;

 Our global equity strategists are calling for a continued style rotation into Valuestocks over Growth stocks;

 We believe banks are c.90%the way through legacy remediation charges; Three of the four major banks now have absolute cost reduction targets; Systemcredit growth rates are likely to improve(housing to firmand business torecover fromnegative growth rates).

Factors that cap our enthusiasmfor the sector:

 Stocks are not as cheap as they were,especially after the November Value rallyand strong start to this calendar year;

 Margin pressures remain severe and competition is still very robust,especially inmortgages and Institutional;

 There are significant risks should vaccine roll-outs fail to have the desired effecton COVID-19 infection and mortality rates;

 Economists still expect an uneven recovery,which will see the unemploymentrate remain in the 6%‟s,vs the 5.2%starting unemployment rate pre-pandemic.We give a brief outline of key issues forthe sectorbelow,and provide more detail oneach later in this report.

Macro conditions showing signs of improvement

The Australian economy performed relatively well through the pandemic,benefitingfrom substantial government support,which limited job losses.The unemploymentrate fell again in Dec to 6.6%,however,oureconomists expect gains to be harderwon fromhere and given the step-down in JobKeeper, they expect theunemployment rate to peak at 7.4%(appears more bearish than the market).Underemployment is also a concern,having risen significantly over the 2HCY20.Figure 3:Federal government support measures($bn) Figure 4:NAB GDP forecasts

Sour ce: Comp an y reports, Au stral ian go vernment , APRA, ATO, Westp ac Econ omics Sour ce: NAB

Consumers have become decidedly more optimistic on the economic outlook.WBC‟s confidence measure has risen abovethe cross over,and is now~50%aboveits Apr-20 low,and would suggest confidence has fully recovered. In comparison,Corporates appear more measured,with business conditions and confidence readingsstill below their long run averages.

Figure 5:Austral ian unemployment rate Figure 6:WestpacConsumer confidencesurvey(Dec-20)

Unemployment rate Participation rate(RHS) Con sumer sen timent Cross over (+re/ re)Sour ce: ABS Sour ce: WBC

The outlook forthe housing market has improved markedly.WBC's 'time-to-buy'index has moved above its long run average,which is typically a leading indicatorfor sentiment amongst owner occupiers.This is supported by housing financecommitments data,which shows owner occupiers and first home buyers,have beenmuch more active than investors.ANZ is currently forecasting 9%Australian houseprice growth this year,with risks tilted to the upside.

Medium term growth outlook remains very tough

While declining loan losses support near-term earnings,the pre-provision earningsoutlook remains challenging for the majors,with ongoing revenue headwinds (NIMpressures, subdued credit growth),elevated costs (pandemic related)and furtherprovision build delivering negative FY21 pre-provision profit growth.Lookingfurther ahead,we expect the major banks will return to positive growth from FY22.Figure 7:Majors underlying pre-provision profit growth Figure 8:Majors underlying pre-provision profit drivers(FY20-23)

ANZ CBA NAB WBCSour ce: J P Morgan estimate s Sour ce: Comp an y reports, J P Morgan e stimate s Note: Pre provision profi t growth CAGRshown in brackets

We expect FY21 NIMs will decline a further~9bp on average forthe majorbanks.The main headwinds include: 1)replicating portfolios/equity hedges;2)depositportfolios;and 3)sustained retail competition.We see few levers still available to thebanks to manage these headwinds.These include: 1)deposit repricing(likely limitedto MT to LT deposit products);and 2)the RBAs Term Funding Facility.

Figure9:BanksNIMforecasts Figure10:EstimatedbenefitfromTDrepricing

FY20 FY21E FY22EFY23E 1H21 2H21

Sour ce: Comp an y reports, J P Morgan e stimate s Sour ce: Comp an y data, J P Morga n estimate s

Generally we are positive on the outlook for credit growth in 2021,and believe therisks are to the upside.We view the recent uplift in housing finance commitments asa positive sign for housing systemcredit growth over 1HCY21.Equally,we expectthe drag fromthe repayment of corporate facilities will continue to ease over thecoming months.

Figure 11:Majors housing credit growth forecasts Figure 12:Majors non-housing credit growth forecasts

FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23EANZ CBA NAB WBC Majors ANZ CBA NAB WBC Majors

Sour ce: Comp an y reports, J P Morgan e stimate s Sour ce: Comp an y reports, J P Morgan e stimate s

Costs remain one ofthe big unknowns for the banks this year.Three ofthe four majorbanks have absolute cost reduction targets,but only ANZ has delivered on this to date.WBC will set out a three-year cost plan at its 1H21 result,but the EnforceableUndertaking with APRA announced late last year will make things more challenging.We expect allbanks to delivernegativejaws in FY21,but positivejaws in FY22/23,as revenue and cost pressures from COVID-19 ease.

Figure13:MajorbanksforecastedJAWS Figure14:Loan lossforecasttrajectory

Sour ce: J P Morgan estimates Sour ce: Comp an y reports, J P Morgan e stimate s

At this stage,we do not expect any bankto add meaningfully to collective provisioncoverage in 1H21,with economic indicators running ahead of assumptionsunderpinning ECLprovisioning.That said we may see loans start to sour in themiddle of CY21 after government support has rolled off.

Capital is another area where we see potential upside risk.Banks look set to deliverat the bottomend of expected credit risk migration,which when combined withalready strong capital ratios will likely support increased dividends and eventuallybuyback announcements.

Figure 15:Major banks forecasted dividend buybacks Figure 16:Major banks forecasted CET1 ratio

Loan deferral portfolios continue to be run down

COVID-19 loan deferrals have been declining rapidly over recent months.As shownbelow, total deferrals for the systemhave reduced to$60bn,of which$52bn relatesto the major banks.SME deferrals have declined to$7b($6.3bn for the majors)andhousing deferrals to$49bn($42.5bn for the majors).

Figure 17:Loan deferrals decl ining rapidly Figure 18:Deferralsfor our coverage universe

Hou sing SME Personal Jun 20 Jul 20 Aug 20 Sep 20 Oct 20 Nov 20Sour ce: J P Morgan

Rising long end rates typically signal periods of bankoutperformance

Value outperformed growth in Australia over the final 3mths of 2020.The work wehave done suggests this thematic could persist this year.As shown below, 10yr bondrates have held a close correlation with 10yr forward inflation expectations.Thisrelationship has only broken down twice in the past decade–once in 2012 and lastyear.While the inflationary outlook remains uncertain,we suspect it is more likelythis gap will be closed by 10yrbond rates moving higher.Should this occur, it wouldlikelybe positive forthe banks,which have typically outperformed during periods ofrising long bond yields.

Figure 19:Aust 10yr breakevens vs Aust 10yr bond yield Figure 20:Aust 10yr bond yield vs Major banks rel performance

Aust 10yrbondyld Aust breakeven(RHS) Majors rel ASX200 Au st 10yr bond yld (RHS)Sour ce: Bloomberg Finan ce L P Sour ce: Bloomberg Finan ce L P

Banks to boostdividends in 2021

We expect the majorbanks will opt forprogressive dividend policies overthenext3yrs.We are forecasting FY21 payouts of c.60-70%, rising to 65-75%by FY23.Onour forecasts,CBA can support the highest payout of~75%in FY23,followed byWBC(66%),and ANZ/NAB(~64%).Of the regionals,BEN is likely to be morecapital constrained vs BOQ,given its recent level of growth, running the risk it mayneed to scale backits dividend.