Australian Banks are set to report weaker first-half profits, with high operating costs and intense competition in the mortgage and deposit markets squeezing their margins. The pressure on profits comes despite an initial boost to the banking sector from rising interest rates, indicating a potential slowdown in the strong performance that had been driving the sector’s stock rally. Analysts believe the upcoming earnings reports could mark a reversal of the share price gains seen since late 2023.
Challenges in the Banking Sector
Traditionally, higher interest rates have been beneficial to banks, contributing to wider margins and improved profitability. However, Australia’s “Big Four” banks—Commonwealth Bank of Australia (CBA)
Westpac Banking Corporation (Westpac), Australia and New Zealand Banking Group (ANZ)
and National Australia Bank (NAB)—have faced increasing pressure on their net interest margins (NIM) due to a combination of heightened competition in the mortgage sector and increased costs associated with customer deposits. This has led to a narrowing NIM, which is closely watched by investors as a key indicator of bank profitability.
Analysts at Jarden, an investment and advisory firm, noted that the sector is experiencing margin erosion
with increasing costs related to deposit and mortgage competition
as well as adverse shifts in the deposit mix. This pressure on margins could lead to further downward pressure on profits in the first half of fiscal 2024.
Expected Financial Performance
National Australia Bank (NAB), the second-largest mortgage lender and largest business lender
is expected to report a nine-basis-point narrowing in its net interest margin for the first half of the fiscal year
with cash profit potentially falling by as much as 13%. According to analysts at Citi
NAB’s position as the largest business bank could put it at a structural disadvantage as the economy slows and business credit becomes more competitive. The analysts downgraded their recommendation on NAB’s stock to “sell.”
Westpac Banking and ANZ Group are also expected to report declines in margins and underlying profits. Market data from Visible Alpha suggests similar downward trends for these banks
which are set to report their half-year earnings on May 6 and 7, respectively. Commonwealth Bank of Australia, the country’s largest lender
is set to deliver a third-quarter trading update on May 9
with analysts predicting an 11-basis-point decline in NIM and a profit decline of up to 10%.
Reversal of Stock Rally
The share prices of Australia’s Big Four banks have risen by about 20% since October
driven by investor optimism that 13 interest rate hikes had tamed inflation
prompting hopes of a return to rate cuts in 2024. However
recent unfavorable economic data has led to revised expectations, with total easing now forecasted at just three basis points and a small chance of a rate hike being priced in. Citi analysts noted that this pause in rate changes could leave the bank rally exposed
particularly as the earnings outlook appears less optimistic.
Conclusion
Australian Banks sector is facing significant challenges as competition in the mortgage market and rising deposit costs put pressure on profit margins. The anticipated first-half earnings reports are expected to reflect these challenges, potentially reversing the stock rally that has buoyed the sector since late 2023. Investors and analysts are closely watching for further developments
as the outcomes could indicate a broader shift in the Australian banking landscape and influence the banks’ strategies for the rest of the year.