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Australian Banks Post FY23 Results: Same, Same

Feature Stories | Nov 30 2023

This story features ANZ GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: ANZ

It has not been a good year for bank earnings, and brokers see little change in the year ahead.

-Further bank earnings declines anticipated
-NIMs slip, cost pressures rise
-Capital positions nevertheless solid
-Provision releases to support capital management

By Greg Peel

November saw second half FY23 earnings results from ANZ Bank ((ANZ)), National Australia Bank ((NAB)) and Westpac ((WBC)) and a first quarter FY24 update from Commonwealth Bank ((CBA)).

Bank analysts had already meaningfully downgraded bank earnings expectations earlier in the year but, still, earnings came in below forecast, albeit more modestly than what might have been. Lower net interest margins and higher costs were to blame.

An offset was provided by lower than feared credit impairment expense (bad and doubtful debts) assisting the banks to very strong capital positions (12.2-13.3%), above APRA requirements.

The upshot is those factors impacting on margins are not expected to ease in the near-term, as competition for mortgages and deposits is expected to continue and cost pressures remain. This means further declines in earnings, although capital positions will still allow for healthy capital management.


Net interest income, which reflects the balance of loan and deposit rates, contributes some 80-85% of major bank revenues.

Morgans expects net interest income to continue to be pressured by slowing credit growth, loan and deposit competition, an increasing skew of deposit mix to higher yielding accounts, and higher wholesale funding costs, including the repayment of the RBA’s Term Funding Facility.

As part of the comprehensive policy response to the effects of the pandemic, the RBA established the TFF to offer low-cost three-year funding to authorised deposit-taking institutions (ADIs). The facility closed to new drawdowns on 30 June 2021, at which time $188bn of funding was outstanding. As the facility provides low-cost fixed-rate funding for three years, it will continue to support low borrowing costs until mid-2024.

Morgans forecasts a net interest income decline of -1-3% in FY24.

The other side of net interest margins (NIM) is costs. While the banks have been working at cost-out initiatives, the impact of underlying wages and cost inflation, including the cost of ongoing technology upgrades, has more than offset.

Cost growth is expected to be a further headwind in FY24, with Morgans assuming a further 3-6% rise and Goldman Sachs forecasts a flat 6%, equivalent to that in FY23.

Goldman Sachs expects NIMs to fall -9 basis points in FY24 compared to -11 points in FY23, due to mortgage competition and funding cost pressures. This leads to a forecast of a -12% earnings decline in FY24, and again in FY25.


Asset spreads drove -6-7 basis points of NIM pressure for ANZ and NAB and -10 points for Westpac in the second half, almost entirely due to mortgages, JPMorgan notes.

This broker expects a modest reduction in NIM pressure in the first half FY24, by which time the front (new loans) to back book (existing loans) gap should have narrowed meaningfully. CBA is coming back to peer pricing, but JPMorgan doesn’t expect this to be hugely disruptive.

CBA, Australia’s biggest mortgage lender, had elected over the period to sacrifice market share amidst stiff competition in order to increase profit. The bank is now moving back to be competitive.

Deposits were again a differentiator, with Westpac outperforming. Goldman puts this mostly down to mix impacts, with mix-shift to term deposits more significant in Business Banking.

Analysis by Goldman Sachs has found over the past decade Australian housing lending return on tangible equity has more than halved, from 35-40% pre-FY15, to 18% in FY22 and then 14% in FY23. Furthermore, the returns’ gap between housing lending and all other products was also at its lowest level in a decade in FY23.

Considering the drivers of these returns’ decline, Goldman finds that before 2023, higher capital requirements drove the entire decline in Australian housing lending return on tangible equity or ROTE, with return on assets (loans) slightly higher between FY18 and FY22.

In FY23, the -25% year on year fall in mortgage lending ROTE was entirely driven by lower returns on assets, which in turn was driven by competitive impacts on NIMs. Goldman’s analysis suggests we should not expect these trends to reverse, without political risk.

Bad Debts

The pandemic was expected to increase bad debts and if that didn’t do it, 410 basis points (to end-September) of RBA rate hikes were sure to. Banks thus loaded up their provisions for such an outcome.

But it hasn’t happened.

Bad debts were expected to increase due to rising rates leading to rising unemployment and plummeting house prices, with forecasts suggesting as much as -20%.

That hasn’t happened. The unemployment rate has remained steady between 3.5-3.7% given a shortage of labour (which has prompted a surge in the government’s migrant intake), and house prices only fell around -8% on average and have since been moving back up again.

Loan repayment arrears trends are deteriorating at a gradual, rather than alarming, pace, JPMorgan notes, and households are proving resilient to rate hikes thus far, helped by mortgage competition. Offset account balances are rising again, and the percentage of credit card customers paying the minimum monthly repayment is stable.

JPMorgan retains a watching brief on small & medium enterprises, for which NAB is a primary lender, but notes NAB remains best provisioned.

Lower than expected credit impairment expenses were a highlight for Morgans in the second half, with banks retaining provisioning balances that assume meaningful weakening in economic conditions but asset net write-offs that remained around historically low levels.

Given continued low unemployment and a strong housing market, Morgans has downgraded forecast impairments, which supports forecast earnings, as this broker assumes either asset write-offs won’t lift as much as expected and/or provisions may be released.

Capital Management

Australians invest in banks primarily for their fully-franked dividend yields. As dividends are paid as a percentage of earnings, lower earnings should by rights lead to lower dividends.

However, strong capital positions mean the banks can increase their dividend payout ratios to offset earnings declines, thus maintaining solid yields.

Morgans continues to believe the capital strength and positioning within their dividend payout targets will allow the major banks to retain relatively stable ordinary dividends even though earnings may decline. On this basis, ANZ and Westpac have the highest cash yields at current prices (6.5% and 6.7%), however, ANZ’s is no longer fully franked.

Due to a lack of franking credits, ANZ’s franking fell to 60% from 100% following the latest result. Macquarie suggests the acquisition of Suncorp Group's ((SUN)) banking operations in FY25 could take franking up to 75%-80.

CBA’s yield is significantly less (but fully franked) at 4.5% and NAB sits in the middle at 6.0%.

While highly geared, the Australian majors continue to be amongst the most well capitalised globally, notes Morgans. All have regulatory capital and liquidity ratios that are above the target operating ratios set by APRA. This provides capacity to undertake share buybacks, insulate against a harder economic landing, and/or fund growth.

CBA and NAB already had buybacks underway, while Westpac announced a new $1.5bn buyback with its result. ANZ may announce a buyback, Morgans suggests, once regulatory decisions expected in February have been made regarding its proposed acquisition of Suncorp Bank.


The major banks had some $21bn of total provisions against economic downturn and a rise in bad debts at the end of FY23, Morgan Stanley notes, which is -$3.7bn or -15% below the covid peak, but $3.7bn or 20% above pre-covid levels.

Each of the banks discloses an estimate of “excess” provisions relative to their “base case” scenarios, and Morgan Stanley believes this means there is potential for material provision releases over the next two years. This broker also believes banks will continue to operate with a meaningful buffer above base case estimates.

Prior to covid, ANZ and NAB did not disclose base case scenarios, but both CBA and Westpac revealed they had an excess of $1.2bn above their base case provision requirements.

Morgan Stanley thinks it's reasonable to assume total provision coverage will return to its pre-covid level at each of the banks. Reducing total provision coverage back to pre-covid levels would allow a net provision release of $2bn by the end of FY25, the broker calculates, taking into account growth in risk-weighted assets.

Under this scenario, NAB and Westpac would have the largest releases, but CBA would have the strongest coverage.

Provisions are originally taken from earnings, thus releases would drive up earnings, all else equal, supporting dividends and/or buybacks.

ANZ and Suncorp

The final event of significance on the banking calendar, notes Citi, is the ANZ versus ACCC hearing at the Competition Tribunal regarding Suncorp’s bank. The hearing will take place over nine days from December 4.

Back in August, the ACCC has denied authorisation for ANZ to acquire Suncorp Bank. Ord Minnett noted at the time competition concerns were always going to be the hurdle but had expected it would be approved.

The broker asserted there is abundant competition from other retail banks, foreign banks and non-bank lenders. Still, the ACCC was not satisfied, and Ord Minnett suspects the potential for a preferred Bendigo and Adelaide Bank ((BEN)) merger with Suncorp Bank may have the casting vote.

With ANZ having taken the decision to the Australian Competition Tribunal, Ord Minnett suspects that while the ACCC could be overruled, it is unlikely the deal will proceed.

While there are a range of issues to be discussed at the Tribunal, notes Citi, the most significant to investors is regarding the level of competition in the mortgage market. Did competition broaden post-covid, or was this better attributable to unusually cheap and plentiful funding?

Citi believes the commoditisation of retail banking in recent years means scale is crucial, and the Tribunal will need to decide how smaller lenders will provide scale in this market. The broker thinks on balance the competitive points around mortgages are too difficult. Public benefits and business & agri-banking are also less clear, but unlikely to be definitive.

As such, Citi continues to lean towards an argument the ACCC will succeed in blocking the acquisition.

Broker Preferences

The consensus order of preference amongst the majors from brokers monitored daily by FNArena has not changed since May. Back then saw a total six Buy or equivalent ratings, fourteen Holds and four Sells, and today there are three Buys, fifteen Holds and six Sells.

All price data below are as per afternoon trading on 29th November 2023.

FNArena Major Bank Data FY1 Forecasts FY2 Forecasts
Bank B/H/S
Close $
Target $
% Upside
to Target
% Payout
% Div
% Payout
% Div
ANZ 2/4/0 24.36 26.32 8.43 – 9.6 – 8.0 75.2 6.6 3.4 – 1.4 71.8 6.5
WBC 1/4/1 21.25 22.55 6.13 – 10.2 – 1.0 76.3 6.6 2.5 1.8 75.8 6.7
NAB 0/4/2 28.36 27.77 – 1.85 – 8.0 1.0 77.5 6.0 2.9 1.4 76.4 6.0
CBA 0/3/3 103.34 90.20 – 13.02 – 5.9 1.7 80.6 4.4 3.2 2.6 80.1 4.5

Back in May, broker outlooks for bank earnings were rather bleak.

The order of preference aligns with the percentage by which banks share prices are under or over consensus broker targets.

As is perennially the case, brokers believe CBA is a superior bank but is simply overvalued. No one alive today can remember when this wasn’t the case. Over five years, CBA’s share price has risen 43% and NAB’s 17%, while ANZ is basically flat and Westpac’s has declined -15%.

This despite CBA offering a much lower dividend yield (the result of its relative sector premium).

Among the regionals, Bendigo & Adelaide attracts a mix of two Buys, one Hold and two Sells, while struggling Bank of Queensland ((BOQ)) has one Buy, two Holds and three Sells.

Macquarie Group ((MQG)) also now has a competitive presence in the mortgage market, but as a global investment bank reliant on global investments and proprietary markets trading, is not judged by its mortgage performance. It has three Buys and two Holds.

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