MARKET VIEW
banks led the charge , up by 17 percent on average , with the economic fallout far less severe than originally feared . While the earnings outlook is more volatile , general insurers such as Suncorp and IAG appear undervalued . Asset managers Magellan and Pendal Group ( FY21 Interim Results on the 10 th of May ) similarly look attractive at current prices .
After booking large loan-loss provisions and customer remediation costs last year , we expect bank profits to rebound over 50 % in 2021 . Sitting on strong capital positions and large loss provisions , we expect the dividend payout ratios to be restored in the 70 % -80% range . This puts the banks on attractive dividend yields between 4 % and 4.5 %. Commonwealth Bank the most likely to make capital returns . Home loan deferral balances have fallen to around 2 % of home loans . Strong house price growth and lower unemployment should also help reduce the number of forced repossessions in the short term . Pressure on net interest margins also eased as the banks benefited from a deluge of low-cost deposit funding . We expect the benefit from a higher deposit funding mix to persist over the medium term . A clearer picture of the banking sectors health and potential will arrive in early May , when 3 of the 4 majors report FY21 interim numbers :
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Westpac Banking Corporation ( WBC ) - 3 rd of May , 2021 ;
� ANZ Banking Group ( ANZ ) - 5 th of May , 2021 ;
� National Australia Bank ( NAB ) – 6 th of May , 2021 .
The recent floods on the east coast could derail the expected 2021 earnings recovery for general insurers , but repricing of premiums will support earnings growth over the medium term . Benefits from digitising the claims processes and negotiating better terms with repairers should also support improved margins .
Energy stocks took a breather in the first quarter of 2021 , the ASX 200 Energy Index ending 3 % higher , in contrast to the 26 % jump in the fourth quarter of 2020 . Brent crude continued its rise , up 23 % to just above USD 64 per barrel . But the focus is on Asia LNG prices , which nearly tripled in January to USD 18.50 per mmBtu and were still around these levels in February .
Australian exploration and production companies dominate the Energy Index . Woodside Petroleum and Santos alone comprise approximately 40 % of the index , Woodside shares increased by 6 % in the first quarter and Santos by 14 %. Woodside was coming off the back of a very strong rise in the December quarter
due to its greater leverage to sharply improving LNG prices , while Santos was rewarded for meeting milestones on its Barossa to Darwin LNG project .
After sharp earnings declines in 2020 due to the Saudi- Russia crude price war and the COVID-19-related collapse in fuel demand , Australian E & Ps can expect healthy earnings recovery in 2021 , and refined fuel retailers can expect similar . Confidence for the E & Ps is high given the extent to which price achievement is already locked in . The average Brent crude price in 2020 was USD 41.60 per barrel but the average for first-quarter 2021 is over USD 61.00 per barrel . More importantly , with the LNG contract referenced to crude with a one-quarter lag , a first-half LNG contract of more than USD 7.50 / mmBtu is locked in , up 17 % on calendar 2020 ’ s USD 6.40 / mmBtu average . LNG comprises a material share of larger Australian E & P production , including 78 % for Oil Search , 70 % for Woodside and 40 % for Santos . And if the current USD 65 per-barrel crude price persists to midyear , the thirdquarter LNG contract could be in the vicinity of USD 9.00 / mmBtu . There is also the prospect for the average achieved price to be even higher if the odd spot sale was able to be undertaken at those mid- to high-doubledigit prices .
Our mid-cycle price forecasts remain USD 60 per barrel for Brent and USD 8.40 / mmBtu for LNG , based on an unchanged marginal cost of supply . In the meantime , Saudi Arabia and other OPEC + members are maintaining production cuts , and U . S . shale firms have been targeting little to no growth in 2021 . That means the resurgence of global demand as the vaccines roll-out could support above mid-cycle pricing for much of the year .
Bruce McLeary
Associate Senior Analyst ( 07 ) 3006 7219 bmcleary @ burrell . com . au
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