Bank margins in focus as big four’s profits tipped to hit $33b

Save articles for later

Add articles to your saved list and come back to them any time.

Three of the four big banks will be in the spotlight over the next week as they unveil their full-year results, with investors keen to gauge the state the country’s financial behemoths.

Kicking off with Westpac on Monday, and followed by NAB and ANZ on November 9 and 13 respectively, the results will shed light on the performance of the banks, but also the health of the broader economy amid stubborn inflation and elevated interest rates.

Three of the four big banks will report their second half results in the next week amid increasing cost pressures and elevated interest rates.Credit: Karl Hilzinger

While investors expect profit margins to come under pressure, analysts are also tipping the big four’s full-year combined earnings to approach a record $33 billion, after Commonwealth Bank notched up $10.2 billion in profit at its full-year results in August.

Goldman Sachs co-head of Australian equity research Andrew Lyons said margins across the major banks would probably drop by about 6 basis points in the second half as they faced higher funding costs and competition.

“Higher cash rates should generally be good for retail banks, however, to date, this benefit has been muted by the intense competition across the sector in both asset, and, more recently, deposit pricing,” he said.

A research note from Lyons reported consensus estimates of $7.4 billion in full-year cash profit for Westpac, $7.8 billion for NAB, and $7.6 billion for ANZ.

‘Expect higher wholesale funding costs as central banks try to shrink their balance sheets.’

Despite the high headline numbers, analysts are debating whether this is peak profit for the banks. Jefferies equity analyst Matthew Wilson said the banks’ core profits would probably shrink after three halves of margin-led growth.

The banks’ net interest margins, which compare funding costs with what lenders charge for loans, will be squeezed on both sides of the balance sheet, Wilson said. “Expect higher wholesale funding costs as central banks try to shrink their balance sheets,” he warned, adding depositors would also be seeking higher yields.

Wilson also said some banks, such as Westpac, may have especially sacrificed their margins to regain market share in lending areas such as home loans.

Goldman Sachs’ Lyons said he saw a notable slowdown in credit growth across the banks this year and that it was likely to continue.

“We currently expect one more cash rate rise which, in conjunction with the challenging macro backdrop, should drive housing credit growth down even further,” he said.

Lyons said he expected business lending to soften to 4 per cent over the next year, and housing loan growth to trough at 4 per cent in December.

JP Morgan lead Australian banks analyst Andrew Triggs said mortgage competition and deterioration in the deposit spread – the difference between lending and deposit rates — weighed on banks’ margins but that he expected these factors to moderate over the next six months.

“This should contribute to an improvement in revenue growth,” he said, but noted the 2024 financial year outlook still looked relatively subdued.

Notwithstanding the challenges faced by the banks, all three analysts said the major banks would probably register substantial tier one common equity – that is, capital held as a precaution to protect them in the event of a financial crisis.

Triggs and Wilson said in light of the surplus capital, Westpac could pursue a share buyback, but Lyons said the bank was more likely to favour a larger franchise investment over a buyback.

The analysts said CBA and NAB were unlikely to announce additional buybacks, and that ANZ would likely wait for a final decision on its proposed Suncorp Bank acquisition before pursuing a buyback.

Higher costs and creeping bad debts could also feature in the banks’ results this week.

Lyons said he expected bad and doubtful debt charges – an estimate of a percentage of loans that will not be repaid – to increase modestly from 9 basis points to 13 basis points, and for bank expense growth to step up to 5 per cent a year until the 2025 financial year.

“Banks are increasingly worried about the impact of renegotiating their third-party costs, where post-COVID inflation has been significant,” he said.

“Rising cash rates have the potential to drive higher losses on the banks’ housing portfolios,” he said, but noted borrowing was skewed to higher income cohorts with higher savings, and that stress testing suggested loss ratios should remain contained.

While buffers including higher immigration, low unemployment and residual savings are slowing the emergence of a credit cycle, Wilson warned higher interest rates and sticky inflation would eventually take its toll on Australian households, as bad debts emerged with a lag.

“Looking back to the last classical Australian credit cycle in 1992, we note that whilst interest rates peaked at 18 per cent in December 1989, it took bad debts another 21 months to peak in September 1992,” he said. “Banks are typically impacted late in a business cycle, and it’s still early days. Don’t dream it’s over, it may only be the beginning.”

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.

Most Viewed in Business

From our partners

Source: Read Full Article