The earnings of the major banks rebounded in the recently completed half year reporting season. This was driven by a sharp recovery in bad debts, which were not as bad as initially feared 12 months ago. This allowed the dividends of the banks to normalise, though below pre-COVID (FY19) levels. A contributing factor to these lower dividend levels is a reduction in targeted payout ratios across some of the banks; for example, ANZ and Westpac are now guiding towards payout ratios of 60-65%. This is an acknowledgement that dividends pre-COVID were likely unsustainably high.
Chart 3: Major banks: Dividend payout ratios
Despite undertaking divestments of non-core assets over the last several years, earnings (illustrated by earnings before interest, tax, depreciation and amortisation) for the two diversified miners are expected to approach or surpass that of the prior cycle’s peak in FY11. The chart illustrates a sharp rebound in profitability in the last 12 months, supported by robust demand and tight supply conditions.
Chart 4: Miners’ profits return to peak of prior cycle (FY11 EBITDA=100)
Fifteen months on from the pre-COVID market peak, many equity markets around the world have scaled new highs, spurred by a supportive monetary and fiscal environment combined with a bounce back in corporate earnings. For the Australian equity market, we are now effectively back to where we started; forward earnings on the ASX 200 are now equivalent to pre-COVID levels after an ongoing recovery in the last nine months, while share prices are also approaching the peak of February 2020.
Chart 5: ASX 200 Prices and Earnings – back to where we started