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2017 reporting season wrap up: a look at banks, resource businesses, and retailers

After two years of declining profits, shareholders and self-managed super fund (SMSF) investors have won this year as profits and dividends are up across the board.



After two years of declining profits, shareholders and self-managed super fund (SMSF) investors have won this year as profits and dividends are up across the board. 

A total of 67% of companies reported higher profits than a year ago and 64% raised dividends. Earnings-per-share growth for 2016-17 was around 17.7%, a huge improvement after two years of declining numbers. However, underlying profit growth for Australian listed companies, excluding the volatile resources sector is, around 6%. This is respectable, but well below underlying profit growth in the US of 11%, and around 30% in Europe and Japan.

As these numbers suggest, the winners have predominately been resources companies such as Fortescue Metals Group. On average, resources businesses have lifted profits by 125%. It's a huge turnaround after falling profits for the previous two years on the back of falling commodity prices and cost blowouts. Miners are now reaping the rewards of higher commodity prices and a huge surge in their production levels, as a result of new mines coming on stream at a time when costs are under control. 

Most of the big four banks don’t report during the mid-year reporting season. However, despite profits falling a year ago, bank profits are up by around 7% on average. Banks have overcome margin pressure through raising interest rates and reducing their costs. Higher rates have in part been as a result of pressure on banks to tighten lending standards. Investors and interest-only borrowers now pay substantially higher rates than others. Lending in this area has also been capped. The result is that the banks have successfully used regulatory pressure to widen their margins. At the same time, lending figures have remained reasonable, which has also helped.

Flipside


Not all financial services businesses have performed as well as the banks have. For instance, some insurance companies disappointed. 

Beyond the resources sector, there have been fewer upside surprises and more disenchantments with this season’s results. Only 39% of companies have surprised on the upside, less than normal and the weakest result since 2013, and 31% have surprised on the downside. In particular, outlook statements were mediocre, which is why the share market fell fractionally in August.

Share prices have fallen sharply in cases where companies have underperformed through lower earnings or a reduced dividend. In total, 55% of companies’ share prices outperformed the market the day they reported. But intense volatility beneath the surface has prompted sharp declines in share prices for companies that disappointed. There were different reasons why each of the underperformers failed to impress. 

With trends like online shopping the retailers could have been expected to underperform, but many turned in a solid profit performance. The discretionary retailers and department stores have seen profit growth of around 18% and consumer staples have seen profit growth of around 14%. 

Retailers are in a challenging situation due to worries, which may be overstated, about the arrival of US powerhouse retailer Amazon. Even when it does land in Australia, its impact is likely to take some time to affect other retailers. Aside from this, ongoing competition between the major supermarkets and ALDI has prompted a squeeze on margins that is weighing on the retailers.

Future outlook


Expectations for earnings growth for the current financial year have been revised down to 2.3%, although profit growth for the market excluding resources is expected to remain relatively stable at around 4.3%.

When considering this result, self-managed super fund (SMSF) investors should take into account the relatively strong performance of the global market versus the local market when forming their investment views.
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