Australian banks margin woes linger but rate hikes may lift view

By Shashwat Awasthi

Reuters – Australia‘s “Big Four” banks are set to report a further squeeze on interest margins in their upcoming results dented by growing competition, though the prospect of a recovery aided by central banks’ rate hikes is expected to bolster their outlook.

The banks have tussled with increased competition in home lending amid record low rates and borrowers changing to fixedrate loans, while costs ramp up due to investment in digital capabilities and broader inflation.

These pressures will likely be evident in quarterly results of Commonwealth Bank, and firsthalf reports from National Australia Bank, Westpac, and Australia and New Zealand Banking Group this month.

“We remain cautious on banks. The upcoming results are likely to show significantly weaker net interest margins and signs of rising costs,” analysts at Barrenjoey said.

“But we would not be surprised if banks were more optimistic in their outlook, especially around the benefits of rising rates… This may provide them with some nearterm support.”

Still, earnings at top bank CBA and No. 2 lender NAB would likely have benefited from the flurry of new business they flagged in their reports in February, while No. 3 lender Westpac had also progressed with its cost cutting plan.

No. 4 lender ANZ, meanwhile, had forecast a firsthalf hit from softer performance in its markets business. It has also steadily lost Australian home loan market share since 2019.

“Lower NIM, flat mortgage book, removal of certain bank fees, weak trading income and higher expenses are not a great combination,” Barrenjoey analysts wrote of ANZ, adding that they expect a “soft” firsthalf result.

In a prelude of things to come, midsized Bank of Queensland last month reported a hit to margins from stiff housing loan competition.p

RATES TO THE RESCUE

The Reserve Bank of Australia has all but said it would raise rates to counter supercharged inflation, while the Reserve Bank of New Zealand has hiked rates at its last four meetings to levels not seen since June 2019.

“With the RBA cash rate starting to move higher… investor attention is set to switch to the impact of higher rates on revenue growth and net interest margins with slowing lending growth and house prices,” analysts at Citi wrote.

ANZ, in its trading update in February, had forecast rising rates in New Zealand would relieve some pressure on margins in the second quarter.