Investment Matters

What Matters this week: Budget, and (more) downgrades

The budget took centre stage for the week. Other than reinforcing the strong recovery over the past year in resources prices (which will flow through to a higher corporate tax take) the effect on listed Australia was negligible. Whilst talk of corporate tax reductions and their potential effect is loud, the impact in the short to medium term (or if at all?) is small. Yawn from markets.

AMP saw further turmoil with another three directors resigning, in advance of the AGM. With the departure of 1 x Chairman, 1x CEO and 3x Non-Executive directors, and the arrival of David Murray the scene is set for change. Will it really change anything, or not? Time will tell.

CBA began its program of underwriting the government tax take, with a settlement of its Bank Bill Swap Rate manipulation case with ASIC.  It paid a total of $25m to “in-principle” settle the case with $5m paid as a penalty and $5m to cover ASICs costs. The other $15m will go to a financial consumer protection fund. We expect CBA to increase its contributions to the government further over the coming years! More damaging to CBA’s market price, however, was a 3Q18 result indicating its cash net profit was down 2% over 3Q17. CBA’s price fell 3% on the day.

Westpac, the bank seemingly most prepared to go toe-to-toe with the Hayne enquiry reported a 1H18 cash profit +6% on 1H17. It clearly has been blessed with the best credit management in the world, with reported impairments to average loans of just 11bps (that is 0.11% or 0.0011) versus the size of its loan books. Thus (presumably) putting it in the enviable position of being almost on a first name basis with all the sources of impairment in its books!

Macquarie Group reported an annual financial pillage up 15% on FY17. Popping his head over the Chinese wall, Nicholas Moore collected (another) $19.7m for doing his job holding the “factory” together.

Notwithstanding stronger commodity prices generally, Orica printed a 20% fall in EBIT (operating profit) over 1H17, but pointed to a likely stronger performance in 2H, as sales track to the top end of guidance.

Elsewhere it felt like rainy season for corporate Australia. Earnings downgrades or disappointments were forthcoming from Greencross, Nufarm, Ainsworth Game Technologies, Gateway Lifestyle, Invocare, Godfrey's, Baby Bunting and Incitec Pivot (following on from JB Hifi, Servecorp, Genworth, Boral and Super Retail in recent weeks).