The best is over: that’s the message from Australian banks worried they can’t repeat their blockbuster performance over the next year.
(Bloomberg) — The best is over: that’s the message from Australian banks worried they can’t repeat their blockbuster performance over the next year.
As investors mull the probabilities of a recession and rate cuts from the Reserve Bank of Australia, lenders are warning that credit growth is slowing. And while results released in the last week have shown climbing profits, bank chiefs are cautious on future earnings.
The gloomy outlook comes as Australia’s four biggest banks underperform the S&P/ASX 200 Index this year. National Australia Bank Ltd. is the biggest laggard, down almost 10%, while ANZ Group Holdings Ltd., Westpac Banking Corp. and Commonwealth Bank of Australia are all posting losses. Their shares have fizzled alongside global peers amid multiple lender collapses and an ongoing regional banking crisis in the US.
“Investors see peak profit and net interest margins now being in the rear view mirror,” said Chamath De Silva, a senior fund manager for BetaShares who oversees about A$2.75 billion ($1.86 billion) in fixed income and equities assets from Sydney. That, coupled with chasms in the sector in the US and Europe, “are probably encouraging local investors to consider rotating out of banks into more defensive sectors, such as health care or staples,” he said.
Read: Australia Signals Further Tightening After Unexpected Rate Hike
Here are some of the key takeaways from Australia’s bank earnings:
Economic Uncertainty
Commonwealth Bank, the nation’s biggest lender, cautioned in a third-quarter update that economic growth will continue to slow as the impact of higher rates continue to reverberate. That echoes concerns raised by counterparts at Westpac, NAB and ANZ over the last week.
CBA Chief Executive Officer Matt Comyn on Tuesday said Australia is still relatively well positioned, “given the strength of our banking system, the economic tailwinds from a recovery in population growth and relatively high commodity prices.”
Peak Margins
As ANZ Chief Executive Officer Shayne Elliott said, “there was a little bit of a sweet spot over the last 12 months for financials in a period of rising interest rates.” But now that traders are starting to bet that the central bank will start pivoting to rate cuts later this year, bank shareholders are fretting.
“The key theme is the banks’ margins continue to be challenged — it seems to be a little bit worse than expected,” said Jun Bei Liu, portfolio manager at Tribeca Investment Partners, overseeing A$1.2 billion.
Read: Australia’s March Retail Sales Gain Driven by Food Inflation
Mortgage Competition
The intense fight for customers in Australia’s A$2.1 trillion mortgage market was flagged as a headwind by lenders. “Competition in mortgages is likely to have the largest impact on bank margins in the second half,” Westpac Chief Financial Officer Michael Rowland said Monday.
NAB is one lender that’s opted to invest in other areas because profits are getting so squeezed as some banks offer thousands of dollars in cash back in the fierce battle for customers. Macquarie Group Ltd., which has snared 5% of the market as the newest and fastest-growing bank in mortgages, said the pace of growth in its retail bank slowed in the six months to March 31 as a result of increased competition. The company said it’s not offering cash back for customers, focusing instead on high-quality growth.
Bad Debts
Home loan customers so far are proving resilient, with Westpac CEO Peter King saying that 70% of them are ahead on repayments. That may give borrowers some cushion over the next 12 months, as a huge swathe of loans convert from fixed prices set when interest rates were much lower to floating prices at today’s rates.
At NAB, Ross McEwan also said home loan customers were holding strong for now. “We made contact with 7,000 of our mortgage customers we thought may have been having a little bit of difficulty and only 13 have said ‘yes, we’d like some help’,” he said.
Still, signs of stress are emerging following the rate rises. While sectors such as construction are already in trouble, banks are bracing for more stress to appear in other areas of the economy, such as retail, hospitality and entertainment.
Increasing Stress
“There was really nowhere to hide for Aussie banks,” said Matthew Haupt, a fund manager at Wilson Asset Management in Sydney overseeing A$1.9 billion in equities investments in Australia’s top 200 companies. “With a slowing economic environment we need to watch the asset side of the banks now for increasing stress.”
–With assistance from Swati Pandey.
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