Mark Draper

Mark Draper

 DSC8761This article was written by Mark Draper and appeared in the Financial Review in the month of July 2018.

Mark writes a monthly column for the Australian Financial Review.

 

Good investors are rewarded for not just what they purchase, but just as much by what they let pass.  Could it be that much maligned short sellers could actually help investors avoid some of the stock market ‘bombs’.

Short selling is defined as the sale of a security that is not owned by the seller or that the seller has borrowed.  Short selling profits when the value of an asset decreases in price, enabling it to be bought back at a lower price.  By examining what short sellers typically look for as their targets can help retail investors avoid investment traps.

With this in mind I spoke with Andrew Macken, Portfolio Manager at Montgomery Investments who spent several years working with world famous short seller Jim Chanos.

Short sellers are sophisticated investors looking for weaknesses in businesses and business models.  Macken believes “there are 4 key characteristics that make a great short”.

  1. Structural decline at industry level.  These are structural headwinds within an industry that are likely to last for years not quarters.  Technological obsolescence is a good example of this characteristic such as video rental stores being disrupted by online content providers.
  2. Divergent Expectations.  This exists where market expectations built into the share price are overly optimistic.  Dominoes Pizza is currently one of the most heavily shorted stocks in the Australian market as short sellers question whether future growth may be at a lower level than what is currently reflected in the share price.
  3. Asymmetric risks.  This is when the downside risk is unequal, or greater than the upside risk.  These characteristics can lead to waking up one morning and seeing a share price down 30%. A stretched balance sheet is a good example of this, where one day the business is fine, and the next day the business fails to meet a debt covenant or refinance commitment.  Centro Properties was a high profile case study of this.
  4. Misperceptions.  These are instances of aggressive or creative accounting.  There are numerous ways in the accounting world that a business can be portrayed in a manner that is more flattering than the reality.  This can commonly occur during acquisitions where adjusting items such as goodwill can result in overstating future earnings. Fraud is the ultimate misperception. The Dick Smith IPO, which was labelled the “Greatest Private Equity Heist of all time” by Forager Funds Management is a classic example of a misperception and a detailed analysis on this can be found on their website.

Andrew’s ideal approach is to consider shorting companies that exhibit all four of these characteristics.

Those who own shares in a company that is being heavily shorted, means that sophisticated investors are flagging that some or all of these problems may exist in that company.  An increase in short selling activity could be an early warning signal that a problem exists.  So how can investors determine the level of short interest in a company.

ASIC provides a daily list of short positions on Australian listed companies on their website.  This information should also be available from a stock broker or financial adviser.  The information expresses how much of the company’s shares in percentage terms have been short sold.

Investors may be alerted to potential issues by watching trends of short selling activity and establishing whether the short positions are increasing.  

Clearly short sellers do not always get their calls right, just ask those who recently got burned being short in the Healthscope takeover offer.  But investors would be wise to keep an eye on short activity.  This could allow investors time to reconfirm (or otherwise) the investment case for a stock they own, or intend to buy, that is subject to material short interest.  As they say in sport, the team that makes the fewest mistakes wins, and maybe short sellers can help retail investors make fewer mistakes.

GEM Capital recently hosted a client function with John Grace (Deputy Head of Equities - Ausbil Investment Management).  Ausbil are excellent investors who have enjoyed a very good track record over a long period of time.  They have enjoyed a very good investment return in the last 12 months as well.

The function was relaxed and conducted on a "Question and Answer" basis.

Here is the video of the function, together with a summary of the key topics discussed, together with the approximate time stamp in the video.

Topics covered:

0. Introduction to Ausbil and fund performance (1.00)
1. Overview of Macro Economic themes (2.30)
2. Banking Royal Commission (6.30)
3. One stock that has been our best call .... Bluescope Steel (10.00)
4. Telstra (and Telco sector) (12.00)
5. Question - Impact of Trade War threat (20.00)
6. Thoughts on household debt levels (30.00)
7. Benefits of Company Tax Cut (34.00)
8. Flight Centre (40.00)
9. Bionomics (46.30)
10. China - how is it changing (53.00)
11. Gold (56.00)
12. View on Australian Interest Rates (58.30)
13. Woolworths and Coles and Retail sector (59.30)

 

Tuesday, 24 July 2018 08:02

Housing Credit Crunch

Dan Moore Investors Mutual

Tuesday, 24 July 2018 07:58

Housing Credit Crunch

Livewire recently produced a video with Dan Moore (Investors Mutual) discussing the changes to Australian lending and the likely impact on the economy.

 

Transcript of video

Q. Are tighter lending standards having an impact and where is it being felt? 

Daniel Moore: We're definitely seeing the banks change their lending standards, particularly around loan to income ratios, which has been pulled back quite a bit. They're now sort of having a max of about six times income, which is reduction in the past. And that's having an impact on loan approvals and clearance rates of the market. 

Q. Self-managed super funds have been pulled back from some of their lending. Westpac initially, some of the other banks, is this another part of that puzzle and is it getting worse?

Hamish: We actually are more focused on investor lending. The investors in Sydney and Melbourne were taking anywhere between 50 and 60% of total mortgage flow at the peak about a year ago, which by international standards is just a witheringly high number. There's no international precedent for numbers anywhere near that high. So, it's true that the banks are pulling back from lending to self-managed super funds for real estate. At Watermark, we're much more focused on the impact of investors pulling back. The work that we've done suggests that borrowing capacity of investors is down anywhere between 10 and 20% and we think it's going to keep going. We know from channel checks with mortgage brokers that not all of the banks have rolled out the new loan serviceability requirements, they will do throughout the rest of the year. 

So the tightening should continue to go in our view. 

Q. So a negative for the economy or is there something positive we can say about it? 

Hamish: No not really. I guess long-term it rebalances the economy and millennials can afford a house. If you're a millennial that's probably a positive. So, lower house prices impacts the economy in a bunch of different ways. Directly it's through something called residential investment. Residential investment is building of new houses, renovating existing houses, and dwelling transfers. And there's a lot of literature that says when that peaks as a contribution to GDP as it has done in Australia about 12 months ago, that's a very good leading indicator for an economic slowdown and usually a recession. 

So there's not a lot of good news about the housing market and residential investment rolling over. 

Q. Daniel, housing affordability getting better certainly helps and makes the economic story a bit more sustainable, is that a positive or is there absolutely none as Hamish is suggesting?

Daniel: I think the one positive you can say is that the royal commission happened before the crisis rather than after. Improving lending standards is a good thing, but there's no doubt the short-term impacts are negative. There's a very close correlation between house prices and household gearing level. So as banks are less willing to lend consequentially you would expect house prices to fall. 

Improving lending standards is a good thing, but there's no doubt the short-term impacts are negative.

Q. If we're looking at the ASX listed stocks who is going to be most affected by this, and what should we be aware of there? 

Daniel: So if you look at probably the leading ... so the companies that are right at the pointing end, so the companies that are leveraged to house prices, or new housing. We sort of look at the property developers, we look at building material companies, and probably the retail sectors which sell household goods particularly the most expensive household goods. 

Q. So into that discretionary side, what are the areas that are really flashing red lights for you?

Hamish: I wouldn't disagree with anything that was said before. Most of the work that we've done that informs our view on Australian housing and its impact on the economy was based on what happened in the Netherlands and the UK earlier in the decade. And exactly as described, the mortgage banks actually do reasonably well, it's the rest of the economy that disintegrates. So, retailers go bust, commercial real estate collapses, people stop going to the movies, people stop going to restaurants, but they pay their mortgages. So, we're focused on many of the same areas. 

The mortgage banks actually do reasonably well, it's the rest of the economy that disintegrates.

Q. What would you do portfolio wise? Are there things you'd sell if this thing was going to take hold?

Hamish: Again, what you would sell is reasonably obvious. I think the one area that might be a little counter consensual is owning the housing banks. So again, when we looked overseas in the Dutch downturn houses prices fell about 20%, the banks lost four basis points on their mortgage portfolios, which is not a lot. That same number in the UK was six basis points, which is not a lot. And in Sweden it was about one basis point.

To answer your question in an interesting way, a counter consensual view that we have is that the housing banks actually will do reasonably well in this scenario, and then the businesses that will do badly are the ones that we described before. 

Q. Daniel you mentioned some of the housing stocks, building materials, any of those particularly a sell for you at the moment?

Daniel: I think if we think of the building materials companies, the one that's most exposed to residential housing in Australia is CSR Limited (ASX: CSR), so despite the multiple looking quite reasonable we think those earnings are at the top of the cycle.

In terms of retail probably the stock that's right at the pointing end, which has had a really good run in terms of earnings growth is Nick Scali (ASX: NCK), they're a furniture retailer. So they're probably two stocks we think are right at the pointy end. 

So they've had a good run and now it's time that things are changing. Not all investments are as safe as houses.

Thursday, 19 July 2018 09:51

How to profit from Market Myths

In 1962, President John F Kennedy delivered Yale's graduating class of 1962 a piece of advice that all investors should hold dear:

"The great enemy of truth is very often not the lie - deliberate, contrived and dishonest - but the myth - persisent, persuasive and unrealistic .... We enjoy the comfort of opinion without the discomfort of thought"

All too often, investors rely on conventional wisdom.  Ideas that may have been true one dday, which are perhaps not relevant today. For those investors who fail to question the myths they have always believed, danger lies ahead.  On the other hand, great investment opportunities can stem from the continual questioning of conventional wisdom and the dispelling of myths.

This article has been reproduced on our website with the permission from Montgomery Investment Management.

Is discussed the myths surrounding Consumer Packaged Goods, and why they may be a dangerous place to invest.

 

Click on the image below to download your copy of this report.

 

Tuesday, 17 July 2018 13:10

My Health Records

This information has been sourced from a Government website myhealthrecord.gov.au

All Australians will have an online My Health Record established by November 2018, which is an online reference point for medical professionals.  For those not wishing to have their medical records available online, they have from 16th July 2018 - 15th October 2018 to opt out.

We suggest you take a moment to review the information about My Health Records and decide for yourself how you want to deal with this issue.

 

 

My Health Record is an online summary of your key health information.

When you have a My Health Record, your health information can be viewed securely online, from anywhere, at any time – even if you move or travel interstate. You can access your health information from any computer or device that’s connected to the internet.

Whether you’re visiting a GP for a check-up, or in an emergency room following an accident and are unable to talk, healthcare providers involved in your care can access important health information, such as:

  • allergies
  • medicines you are taking
  • medical conditions you have been diagnosed with
  • pathology test results like blood tests.  

This can help you get the right treatment. You don’t need to be sick to benefit from having a My Health Record. It’s a convenient way to record and track your health information over time.

You control your record

You can choose to share your health information with the healthcare providers involved in your care.

If you wish, you can manage your My Health Record by adding your own information and choosing your privacy and security settings. For example, you can:

Next time you see your doctor, ask them to add your health information to your My Health Record. 

By allowing your doctors to upload, view and share documents in your My Health Record, they will have a more detailed picture with which to make decisions, diagnose and provide treatment to you. You can also ask that some information not be uploaded to your record.

A My Health Record for every Australian in 2018

This year, you will get a My Health Record unless you tell us you don’t want one. As more people use the My Health Record system, Australia’s national health system becomes better connected. The result is safer, faster and more efficient care for you and your family.

If you don't have a My Health Record, and don't want one created for you, you can opt out between 16 July and 15 October 2018. Find out how you can opt out

When will I get a My Health Record?

The new records will be available from 13 November 2018. If you want a My Health Record before then you can register now.

 

Information from healthcare professionals  

Healthcare providers such as GPs, specialists and pharmacists can add clinical documents about your health to your record, including:

  • an overview of your health uploaded by your doctor, called a shared health summary. This is a useful reference for new doctors or other healthcare providers you visit
  • hospital discharge summaries
  • reports from test and scans, like blood tests
  • medications that your doctor has prescribed to you
  • referral letters from your doctor(s).

Information from Medicare

Up to two years of past Medicare data may be added to your record when you first get one, including:

  • Medicare and Pharmaceutical Benefits Scheme (PBS) information held by the Department of Human Services
  • Medicare and Repatriation Schedule of Pharmaceutical Benefits (RPBS) information stored by the Department of Veterans’ Affairs (DVA)
  • organ donation decisions
  • immunisations that are included in the Australian Immunisation Register, including childhood immunisations and other immunisations received.

Information you can add to your record

You, or someone authorised to represent you, can share additional information in your record that may be important for your healthcare providers to know about you. This includes:  

  • contact numbers and emergency contact details
  • current medications
  • allergy information and any previous allergic reactions
  • Indigenous status
  • Veterans’ or Australian Defence Force status
  • your advance care plan or contact details of your custodian. 

What to expect when logging into My Health Record for the first time

The first time you log into your My Health Record there may be little or no information in it. There may be up to two years’ worth of Medicare information such as doctor visits under the Medicare Benefits Schedule (MBS), as well as your Pharmaceutical Benefits Scheme (PBS) claims history. If you choose, you can remove this information after you log in.

Information will be added after you visit your GP, nurse or pharmacist. You can add your personal health information and notes straight away.

Uploading old tests and scans

Your medical history, such as older tests and scan reports, will not be automatically uploaded to your My Health Record. Only new reports can be uploaded by participating pathology labs or diagnostic imaging providers.

Talk to your doctor about uploading a shared health summary to your My Health Record. This summary can capture important past health information such as results from previous tests or scans, which can be shared with your other treating healthcare providers. 

Friday, 13 July 2018 11:49

China - What just happened?

Reproduced with permission from Charlie Aitken - Aitken Investment Management

 

This article is written by Charlie Aitken, founder of Aitken Investment Management.

 

Substantial outflows from emerging markets ETFs, driven by US Dollar strength, triggered large and relentless selling in the largest index weightings in Hong Kong (Chinese equities). Fears of a “trade war” have also weighed on China sentiment.

The Hang Seng China Enterprises Index (HSCEI) fell -7.6% in June, while the Chinese mainland benchmark, the Shanghai Composite Index (SHCOMP) fell -8.0%. From mid-January peak both indices are now down over -20%, triggering a technical “bear market”.

It has been a brutal and indiscriminate technical sell-off in Hong Kong. However, we remain confident in the investment case for Chinese consumer facing companies and the major technology platforms which have pulled back to what we consider compelling investment arithmetic. We will explore that investment arithmetic later in this note.

While Chinese stocks listed in China had a very poor month, it seems somewhat odd to us that China facing stocks listed on developed market exchanges such as the NYSE or ASX proved broadly immune to any price falls. That most likely suggests this is a violent emerging market to developed market rotation, rather than a wholesale de-rating of all things China facing.

We believe this is a technical ‘clearance sale’ in leading Chinese equities and we want to emerge from this rotational correction holding the very best fundamental portfolio of tier one Chinese structural companies we can.

Outflows from Emerging Market equities

The US dollar rally that began in May has seen significant outflows from Emerging Market equities. We can use the IShares MSCI Emerging Market ETF (“EEM.US”) as a good proxy to illustrate this point. EEM has seen a 20% redemption of units on issue since April (approx. $7.7bn of outflows at today’s prices). China is the biggest weighting in this ETF at 30% and Tencent is the biggest single stock weighting at around 5.5%, so redemptions from this ETF and all other products like it lead to direct selling of Tencent and other large cap Hong Kong Listed equities.

The following chart shows the number of units outstanding in EEM (the blue line) versus the DXY USD Dollar index (the red line) which we have inverted. In simple terms USD strength has seen an exodus from Emerging Market equities. For context the outflow in EEM over the past 8 weeks is greater than the outflow for the entire of 2015 when the world was in a China-centric deflationary spiral.

In 2015 evidence of a fundamental slow-down in China was obvious everywhere from Chinese economic data, to global PMIs, trade data, commodity prices and even Australian listed China facing equities. The most obvious example is BHP shares which have historically had a very strong correlation to H-Shares. The chart below shows the HSCEI Index (H-shares) versus BHP. One of these 2 is sending us the wrong message on Chinese economic fundamentals. The gap in this chart will close one way or another in the second half of this year. Note the divergence started around the same time as the EM exodus (BHP is not part of EM equities).

Is China grinding to a halt?

Relative to the strong-growth seen in 2017 we are definitely seeing a moderation of growth in China. This was evident in our recent trip to China and can been seen in monthly data series such as the YoY change in Industrial Enterprise Profits and the Li Keqiang index (which measures YoY change in rail freight data, power consumption and bank lending). However as can be seen below the picture at this stage is fundamentally different to what we saw in 2015. The key question is, are HK equities pre-empting a move in fundamentals or is this a market driven panic? 

What are markets pricing in?

Whilst the 2015 bear market in Chinese equities saw a combination of very high starting valuations and badly deteriorating economic fundamentals the picture today is quite different. The market PE for domestic Chinese equities is already below the trough of 2015. 

We see plenty of inconsistencies in global cross asset market prices at the moment. It feels like Hong Kong listed Chinese equities are pricing in a harsh slow-down in global growth whilst other equity markets (and other asset classes such as gold and commodities) are taking a more optimistic view. 

Below we present a snapshot of AIM’s four biggest Chinese holdings.

We believe all these businesses have very bright futures and are very attractively priced at current levels. They are the leaders of their industries, have expanding moats, have massive addressable markets, and are all platform businesses or benefitting from technology. We believe their earnings growth outlook is unchanged, we have recently met with management teams, and we have great confidence in their business strategy and execution abilities.

While it was a disappointing end to the financial year for those of us who are structurally bullish on China, we remain of the view that the potential for strong total returns remains in FY19 particularly given the entry points and highly attractive valuations of our core high conviction Chinese investments above.

Don’t run away from the clearance sale: take advantage and buy the best Chinese consumer brands while they are cheap.

Monday, 02 July 2018 11:12

The Best of the Best - June 2018

The Investment Team at Montgomery Investment Management regularly produce a report "Best of the Best".

We bring you the June 2018 edition.

This report is put together by the investment team, and not a marketing spin doctor.

 

Click on the image below to download your copy.

 

Monday, 02 July 2018 08:35

Tax Cuts - what it means for you

The 1st July 2018 brings in the first round of income tax cuts that have been ferociously debated in parliament.

 

The table below outlines the level of tax that is currently paid for a range of incomes and projects the value of future tax cuts.

Income Current Tax Paid Tax cut from 2018/2019 Tax cut from 2022/2023 Tax cut from 2024/2025

Tax Paid in 2025

 $20,000  Nil  $0  $0 $0 $0
$40,000 $4,547  $290  $455  $455 $4,092
 $60,000 $11,047  $530  $540  $540 $10,507
$80,000 $17,547 $530 $540 $540 $17,007
$100,000 $24,632 $515 $1,125 $1,125 $23,507
$150,000 $43,132 $135 $2,025 $3,375 $39,757
$200,000 $63,632 $135 $2,025 $7,225 $56,407

 

The person earning $40,000 will pay 6% less tax in 2018/2019 and then in 2022/2023 will pay 10% less tax than they currently do.  

A person earning $150,000 will pay 0.3% less tax in 2018/2019 and then in 2022/2023 will pay 4.6% less tax than they currently do.  So while the gross dollar value of tax saving is higher for the $150,000 income earner, they are actually receiving a lower percentage tax cut.  The contribution to the tax base of someone earning $150,000 is also 10 times the value of the $40,000 income earner.  We dispute the view that is held in some sections of the media that suggests those earning lower amounts of income are being discriminated.

It is like suggesting that a person with a $500,000 mortgage receives a higher benefit from a 1% interest rate cut than a person with a $100,000 mortgage.  They are both treated equally in terms of the cut, but the higher mortgage saves more due to simple mathematics.  In reverse the person with the higher mortgage pays more when rates rise.

So it is with income tax, those who earn more, contribute more to the tax base for the purposes of health, education etc.  So when tax rates are reduced it is also logical that the dollar value for those earning higher incomes is also higher.

 

Tuesday, 05 June 2018 11:32

Let's take a look at the Banks results

Article reproduced with permission from Montgomery Investment Management.

 

In the midst of the Royal Commission into Misconduct in Financial Services, the major banks have released their latest half yearly results. The market headed into the reporting period with a high degree of apprehension given the public backlash emanating from the revelations coming from testimony at the Royal Commission to date.  In a number of articles over a long period of time, we have discussed our concerns about the outlook for revenue growth given the impact on loan book growth, that is likely to result from the turn in the long term structural decline in interest rates globally. Expected is a slowing of loan book growth, as volume growth is no longer boosted by the falling cost of debt, which has allowed households and businesses to sustain progressively higher levels of debt.

The first half results showed signs of this playing out, with loan book growth, based on the average balance for the period, continuing to slow on a sequential basis.

 

 

 

Screen Shot 2018-05-14 at 5.24.13 pm
Source: Company Data *CBA data represents the 3 months to 31 March 2018

Slowing loan growth has been offset in recent periods by rising net interest margins, as a result of the repricing of interest only and investment property mortgage rates. In 1H18, the banks benefited from some easing in the level of competition for deposits.

However, over the last couple of months, the banks have been exposed to rising benchmark short term wholesale interest rates (BBSW and LIBOR) relative to official central bank rates. This is expected to see the funding costs of the banks shift from being supportive for net interest margins to now presenting a headwind.

Net interest margins were down for three of the four majors, with negative mix in mortgages (switching to lower rate principal and interest mortgages) and a full period impact of the bank levy offsetting any residual repricing benefit.

The other factor to take into account is the impact of trading and markets activity on the net interest margin. This is a very volatile part of the equation. For ANZ (ASX:ANZ) and National Australia Bank (ASX:NAB), a weaker trading performance relative to 2H17 reduced net interest margin (NIM) in 1H18, while for Westpac (ASX:WBC) it boosted NIM materially.

Given the volatility of this income, this is a low value driver of NIM and should be looked at in a historical context when projecting into forward periods due to the likelihood of mean reversion. This is particularly relevant for WBC’s result in which the Markets and Trading component of the NIM is well above historical levels and therefore should be treated with a degree of caution when forecasting from this base.

The chart below shows the annualised rate of growth in net interest revenue for the four major banks in 1H18 relative to 2H17. Growth, excluding the impact of trading, provides a better indication of the underlying sustainable rate of growth in the period as it strips out the volatile impact of trading activity on NIM.

Screen Shot 2018-05-14 at 5.25.26 pm
Source: Company Data *CBA data represents the 3 months to 31 March 2018

Non-interest income was similarly soft, particularly once trading revenues and one-off profits from the sale of investments and businesses are excluded. This resulted in total revenue growth in the low single digits. We note that the Commonwealth Bank of Australia (ASX:CBA) trading update provided limited detail on the underlying drivers.

However, according to CLSA Australia’s banks team, net interest revenue was negatively impacted by a restructuring charge on a hedge from a funding issue last year, as well as a reduction in trading revenue and a proportionally more significant impact from the increase in Bank Bill Swap Rate (BBSW) in March given CBA’s announcement was for three rather than six month earnings.

Operating cost growth was mixed with higher growth from NAB and CBA while ANZ continues to reduce its cost base. The Royal Commission resulted in elevated cost growth in the period, and this will continue into the rest of this calendar year and potentially beyond. Excluding this, revenue would have increased in the March quarter.

Screen Shot 2018-05-14 at 5.26.58 pm

Source: Company Data *CBA data represents the 3 months to 31 March 2018

NAB’s increase excluding the upfront redundancies and write downs from its cost reduction strategy reflects an uplift in investment in the near term to assist the transformation of the business over the next few years. However, based on its guidance for flat operating costs between FY2018 and FY2020, aggregate costs over this three years period will be higher than average analysis forecasts prior to the announcement of the cost reduction programme in November last year.

Screen Shot 2018-05-14 at 5.28.04 pm

Source: Company, UBS, JPM, CS, DB, CLSA, Citi

Slowing revenue growth is continuing to turn up the heat on management to reduce operating costs as an offset.

Provisions for bad debts were once again a positive for the net profit outcome.

Unlike in recent results, the main source of surprise came from lower new individual provisions rather than write backs of prior period charges. This is despite a continuation of the modest increases in mortgage arrears. Of most concern was CBA’s comment that “there has been an uptick in home loan arrears, influenced by a small number of customers experiencing difficulties with rising essential costs and limited income growth”. This could be the first signs of a squeeze on household budgets that has been a core part of the bear thesis for those warning about the outlook for the bank stocks.

While ANZ and Westpac (ASX:WBC) continued to reduce their collective provision balance as a proportion of credit risk weighted assets (meaning these banks have less of a buffer against a downturn in credit quality), NAB actually increased its collective provision balance.

Screen Shot 2018-05-14 at 5.29.06 pm

Source: Companies

Bank capital levels were generally in line with market expectations, with ANZ surprising to the upside. CBA highlighted the future impact of the Prudential Inquiry by APRA which will require it to increase its operational risk regulatory capital by A$1billion from 30 April 2018. The introduction of AASB 9 will also see CBA increase its collective provision balance by A$1.05 billion. These two issues will reduce CBA’s Common Equity Tier 1 *(CET1) ratio by 53 basis points. CBA expects a 70 basis point increase in its CET1 ratio from the sale of its Australasian life insurance operations in the next 8 months, but this will also reduce CBA’s sustainable earnings and capital generation in future periods.

The Montgomery Funds own shares in Westpac and Commonwealth Bank  This article was prepared 15 May 2018 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Westpac or Commonwealth Bank you should seek financial advice.