Australian Banks Post First Half Results: Sugar Hit

Feature Stories | May 23 2024

The market responded positively to bank earnings results, but looking under the surface, analysts see a different picture.

-Bank earnings fall in the half
-Buybacks and dividends drive positive responses
-Bad debts remain benign, for now
-Analysts negative on the sector

By Greg Peel

Looking at share price responses, one can easily be forgiven for thinking Australian banks had a great reporting season. However, sector analysts at Macquarie conclude the underlying fundamentals tell a different story.

Banks' pre-provision earnings declined by -1-4% (or -4-10% excluding the positive contribution from markets trading income) with headline earnings supported by ongoing cyclically low impairment charges. The key positives in this reporting season for Macquarie were balance sheet strength, a favourable economic backdrop, a solid business lending pipeline, and the banks essentially meeting or slightly exceeding rebased (lower) consensus expectations.

In contrast with rebased earnings expectations, banks' share prices have rallied by some 30-40% since the middle of 2023, leaving current valuations hard to justify, in Macquarie’s view, particularly given the backdrop of the underlying earnings trends.

ANZ Bank ((ANZ)), National Australia Bank ((NAB)) and Westpac ((WBC)) all reported first half FY24 earnings results this month, while Commonwealth Bank ((CBA)) provided a third quarter update.

Downward Trend

While the banks reported “sound” results for the first half, Wilsons suggests, performances were generally a touch ahead of consensus expectations across key line items, but the sector’s medium-term earnings outlook still remains challenged.

Following modest forward upgrades, consensus forecasts still point to negative earnings per share growth for the ASX200 Banks Index in both FY24 and FY25, Wilsons notes.

Weaker net interest margins (NIMs) have been the biggest headwind to bank earnings over the last twelve months. NIMs remained under pressure in the first half amidst competitive pressures in the mortgage and deposit markets, which has more than offset, Wilsons notes, the benefits of a higher interest rate environment.

Still, improving market dynamics support a stabilisation in NIMs over the second half and FY25, with further downside seemingly limited from here, this broker believes. All of the major banks have pointed to easing levels of mortgage competition supported by a more stable interest rate environment, and a declining level of fixed rate expiries.

Remember the “mortgage cliff”? We were all doomed, as fixed rate loans acquired at levels as low as 2% expired amidst rapid RBA rate rises, automatically switching borrowers from 2% fixed to a standard variable rate, which today will cost a borrower around 6%.

That risk is now declining, as the number of remaining expiries winds down.