By Joyce Moullakis
The major banks are set to shrug off economic headwinds and rising costs to post combined annual cash profits of about $28.4bn, as sharp interest rate hikes help to buoy loan income.
Westpac, National Australia Bank and ANZ are poised to rule off their respective September 30 year-ends this week, ahead of another official rate rise expected next week.
Bloomberg analyst estimates have those banks reporting combined annual cash profits of almost $18.8bn, despite inflationary pressures including rising wages.
Commonwealth Bank has a June 30 year-end and in August reported an 11 per cent rise in cash profit to $9.6bn for the 12-month period from the prior year. That came as business lending volumes jumped and loan losses remained subdued.
Last year, the big four posted combined annual profits of $26.8bn from continuing operations as they benefited from a hot housing market and bumper loan growth but had to manage margin pressure.
ANZ kicks off the upcoming banks’ reporting season on October 27, while Westpac and NAB will hand down results in early November.
Banks are benefiting from rising interest rates because savings and deposits pricing in many cases is not being increased anywhere near as fast as mortgage rates. That gives banks a bigger net interest margin. The competitive jostle to win customers as lending slows means some of that benefit will be eroded, largely through offers to new customers.
NAB on Monday outlined further increases to savings rates across parts of its business, but in a limited way.
NAB’s iSaver four-month introductory rate increases by 50 basis points to 2.3 per cent, while the bank’s retirement account rises by 0.25bps to 0.5 per cent for balances of $10,000 to $49,999.
“Margins should be really good because of all the interest rate hikes coming through,” said Matthew Haupt, the lead portfolio manager at WAM Leaders.
“The market has already discounted a lot of the impacts that will come through from the interest rate hikes.”
But Mr Haupt said investors continued to focus on the domestic economy’s outlook and the risk of a marked slowdown.
“Everyone is trying to guess direction, which gets back to what (Reserve Bank) governor Phil Lowe does.
“How hard he goes and whether they drive us into a deep recession or whether they pause … the biggest concern at the moment is the macro environment and the Australian housing market – that’s how investors are thinking about it.”
WAM Leaders expects the cash rate to peak at 3.5 per cent and that rate hikes will see the 20 per cent-plus jump in house prices during the pandemic completely reversed.
Morgan Stanley strategists now expect a 20 per cent peak-to-trough decline in house prices, bigger than an earlier 15 per cent estimate and the largest nominal price decline on record.
“Household debt sits at 185 per cent of income, one of the highest leverage rates in the world, and importantly, the majority of this is at variable interest rates,” they said.
Opal Capital Management’s Omkar Joshi is keeping close tabs on bank net interest margins and costs as they prepare to report earnings.
“There will be a focus on how much margin benefit the banks receive from the recent increases in interest rates given the continued competitive intensity in mortgages,” he said.
“Volumes and costs will also be an area of focus, given the weakening housing market and inflationary cost imposts.
“It wouldn’t be a surprise if Westpac were to walk away from their cost target, given the change in the environment.”
Westpac has so far stuck to its target of reducing its cost base to $8bn by 2024, while ANZ and NAB have moved away from their own headline targets on overall costs.
On rising big bank costs, Mr Haupt said: “It looks like they are all going to cop at least a 5 per cent cost increase on wages, and you’d expect that Westpac would have to walk away from their target.”
Despite the economic and cost pressures, banks should pay out healthy dividends, Mr Joshi said.
“I don’t think the dividend outlook is at risk for now, given we haven’t really seen much of a slowdown yet.”
Citigroup banks analyst Brendan Sproules believes further share buybacks and other capital management will be delayed because banks will need to meet new capital requirements in 2023 and navigate a slowing economy.
“Further capital management in this cycle is likely to be pushed out to FY24, as boards consider asset quality and capital reforms.
“We expect Westpac to be best placed post-divestments,” he said.
Given last week’s damaging data breach at telecommunications group Optus, the banks are also being hyper-vigilant about the potential for 9.8 million Australians to be subjected to possible scams or fraudulent activity.
In light of the breach, the federal government, Australian Competition & Consumer Commission and the prudential regulator are liaising and working with banks to protect customers from financial scams.
CBA is contacting customers, urging them to be alert to scams and cautious of any requests for personal or financial details.
“We know that scams continue to rise at an alarming rate and, like most, have watched this rise with growing concern,” the bank said in an email to customers. “Scams and fraud will always be out there, and by working together we can help detect and prevent suspicious activity.”
CBA said it had taken measures including introducing artificial intelligence “to detect suspicious and unusual behaviour” when customers were using its online banking or app to alert them of scams, while also doubling the size of scam protection and prevention teams.
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