Australia’s biggest banks are likely to report weaker first-half profits as high operating costs and competition to sell mortgages and deposits squeeze margins, potentially reversing a stock rally that , according to analysts, has led to overheating of the sector.
Traditionally beneficiaries of rising interest rates, the country’s four big lenders have instead spent the last year sacrificing margins to underwrite new property loans and pay depositors more, thereby reducing their “net interest margin “, highly watched, and exerting downward pressure on profits, according to analysts.
This could undermine the sector’s share price rise since the end of 2023, which was based on signs that 13 interest rate hikes had brought inflation under control and hopes of a return to rate cuts in 2024. Some analysts now expect a longer wait for rate cuts, and some suggest the next move could be upward.
“We expect further margin erosion in the first half of fiscal 2024 as the industry continues to be impacted by deposit-mortgage competition and adverse changes in deposit mix,” they wrote analysts at investment and advisory firm Jarden in a note to clients.
National Australia Bank (NAB), the second-largest mortgage lender and largest business lender, is expected to announce a nine basis point reduction in its first half net interest margin when it begins reporting season on 2 May, with a likely drop in liquidity of 13%, analysts estimated.
“As the economy slows at some point, we expect NAB, as the largest merchant bank, to be at a structural disadvantage relative to its peers,” wrote Citi analysts, who recently downgraded their recommendation on Big Four stocks to “sell.”
“As corporate credit slows and becomes more competitive, relative momentum will be disappointing and will put pressure on NAB’s expanded premium valuation.
A similar decline in margin and underlying profit is expected for Westpac Banking and ANZ Group, according to market data aggregator Visible Alpha and other brokerages. Westpac and ANZ, the third and fourth largest banks, announce their half-year results on May 6 and 7 respectively.
The Commonwealth Bank of Australia, Australia’s largest lender, will report its third quarter results on May 9. Analysts expect margins to fall by 11 basis points and profits to fall by 10%.
Shares of lenders have risen by about a fifth since October, when investors began forecasting that economic data indicating inflation was being brought under control would prompt central banks to begin cutting rates from mid-2024.
However, as unfavorable economic data has poured in since the start of the year, bets have been downgraded, with forecasts for total easing now standing at 3 basis points, and even a small risk of rising rates. rate now being integrated into prices.
“This pause in rates would leave the banking rally exposed, with little reconciliation between the multiples and the gloomy earnings outlook that is currently the consensus,” Citi analysts said. (Reporting by Sameer Manekar in Bengaluru; Editing by Byron Kaye and Christopher Cushing)
