Feature Stories | Nov 30 2023
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 of 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.