Over the last month, Australian growth equities have outperformed value by 6%. The performance has in part been driven by a flattening of the Australian yield curve, with short term yields rising sharply as central bank rate hikes have been brought forward. Also contributing to growth’s outperformance has been a modest reporting season for the major banks. Earnings downgrades followed Westpac and Commonwealth Bank’s results as evidence of pressure on net interest margins emerged.
Chart 3: Growth outperforms as yield curve flattens
Earnings downgrades for the banks in November mean that the sector is now likely to end its streak of monthly positive earnings revisions, which extends back to August 2020. The banks have been supported over the last 12 months by a marked improvement in their bad debts along with various share buybacks, a product of their strong balance sheets. However, the sector faces a more challenging year ahead on the back of a softening margin outlook and APRA’s interventions to cool the housing market.
Chart 4: Banks’ positive earnings revisions streak ends
Dividends for the major banks bounced back sharply in FY21 after the significant cuts from COVID-impacted FY20. For each of the majors, however, dividends remain below pre-COVID levels and are only expected to show more modest growth over the next two years to better reflect the underlying operating environment of the sector and reduced payout ratios.
Chart 5: Banks’ dividends recover (FY18 = 100)