Australia | 11:16 AM
The housing correction, further RBA rate hikes and the macroeconomic backdrop all pose downside risks to bank earnings ahead.
- Housing correction accelerating faster than expected
- One or two RBA rate hikes expected by year-end
- Signs of potential weakness in credit quality
- Banks still trading at above-average multiples
By Greg Peel
The Australian housing downturn has accelerated faster than many expected, with price falls spreading beyond Sydney and Melbourne, and auction clearance rates falling from the February high.
This is likely to be exacerbated by further RBA hikes, with the market now pricing an additional 1.5 rate hikes (around a 65% chance of a 25bps rate hike in September and an almost 50% chance in November).
As such, Macquarie has downgraded its view and now expects national home prices to fall around -10%.
There has been a major shift in operating conditions, Morgan Stanley suggests, due to RBA rate hikes, a higher cost of doing business and cost of living, and changes to property-related tax concessions.
At the recent quarterly bank reporting season, underlying trends and management commentary highlighted the change in operating conditions.
Demand for new mortgages is weak, but Morgan Stanley notes the post-Budget decline in applications is being mitigated by refinancing activity. Business loan growth remains robust despite the fall in business confidence and conditions.
However, mortgage competition is increasing, term deposit rates have risen, and deposit mix-shift remains a margin headwind.
Macroeconomic Backdrop
On the subject of macroeconomic dynamics, there is disagreement among analysts.
The macro outlook has continued to deteriorate since June, Macquarie posits. The housing market correction has gathered pace, unemployment is gradually increasing, and confidence remains weak.
Indeed, Macquarie’s model is now around the weakest since early 2023. With another rate hike now likely in 2026, and house prices at risk of correcting -10%, Macquarie expects the outlook to deteriorate into 2027, which will weigh on bank performance.
Importantly, with low-cost deposits now largely hedged, Macquarie thinks the direct impact of further hikes on banks has become negative, with further hikes weighing on credit growth and credit quality.
By contrast, Citi believes Australia’s economic backdrop has become slightly more supportive for banks despite a weakening housing market.
Stronger-than-expected GDP growth, resilient consumption, a healthy labour market, and robust business investment have reinforced expectations of one to two RBA rate hikes.
While housing conditions are softening, with capital city prices down -4% over the quarter and investor credit growth slowing materially, Citi maintains the impact on bank earnings is likely limited.
Higher rates may reduce borrowing capacity and pose downside risk to mortgage growth, but bank profitability is more sensitive to net interest margins (NIM) than loan growth.
Additional rate hikes, higher swap rates, and easing term deposit pricing pressure should provide a positive tailwind for margins and revenue, Citi believes.
Deposit prices have increased steadily over the past 12 months, UBS notes, and still provide the largest differences in pricing between banks compared to mortgages which are more tightly clustered.
UBS sees the majors all priced some 50-70bps above competitors, but tightly priced among themselves (7.5%), which UBS sees as the stage being set for potential further increase in competition.
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