Banks cash in on buoyant property and jobs market
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National Australia Bank, Westpac and ANZ Bank have pulled off a better than expected financial year, after the property market and the unemployment rate both turned out to be surprisingly resilient despite steep interest rate rises.
As the three banking giants closed their books on the financial year on September 30, analysts said key risks facing banks – particularly the prospect of a sharp increase in bad debts – had so far been more modest than expected.
NAB, ANZ and Westpac have ruled off a financial year that has been better than feared.Credit: Paul Rovere
Helped by this economic backdrop, NAB and ANZ are forecast to break their previous profit records when they report their results next month, which could lead to further scrutiny of banking profits.
Even so, analysts still expect longer-term headwinds for bank returns. They point to rising costs and stiffer competition in mortgages, and warn that bad debts are still likely to rise as a result of interest rates jumping 4 percentage points since May 2022.
Commonwealth Bank, which runs on a June financial year, reported record full-year profits of $10.2 billion in August and a report from UBS last month said markets were tipping full-year profits of about $7.5 billion for both ANZ and Westpac, and $7.8 billion for NAB.
If delivered, those results would be record cash earnings for ANZ and NAB, while Westpac’s earnings were higher in 2018. It would take combined profits across the big four to about $33 billion for this year, a record.
Analysts are forecasting slightly weaker results in 2024 and 2025 as the full effects of rate rises flow through.
UBS banking analyst John Storey said that even though big bank profits were likely to decline in 2024 and 2026, this year had been better than expected for the banking giants’ bottom lines.
“The big credit cycle that everyone has been expecting has not materialised,” he said. “Unemployment rates are still pretty low, wage increases that have come through have been pretty high, and property prices have been resilient.”
Storey said that while NAB, ANZ and Westpac’s large full-year profit results might attract scrutiny, as CBA’s result did in August, the banks were likely to point to their wider economic contribution.
“Australian banks in particular operate with a certain social licence,” he said. “I probably do expect them to come under a bit of scrutiny.”
Jefferies analyst Matt Wilson said that while 2023 had been a better year than feared for banks, he believed the industry was going through deep-seated changes that were likely to make conditions tougher in the future. One such change was the move away from the era of low interest rates.
“I still think the biggest issue confronting our economy is rates will be higher longer because inflation will be stickier than people expect,” Wilson said. “And because rates will be higher for longer, that may cause a credit cycle.”
Another change, he said, was a shift towards greater competition for deposits and loans, as Westpac in particular tried to make up for past losses in market share.
“An oligopoly works when market share is relatively stable. It’s a long time since we’ve seen competition on both sides of the balance sheet,” he said.
Figures from the banking regulator on Friday showed Westpac had the fastest growth of the big four in mortgages and deposits in August, and that housing credit grew at 4.3 per cent in the previous year.
Jarden analyst Carlos Cacho said banks still faced a challenging outlook as they managed rising costs, and the market was focused on how competition was affecting margins. He said the market had gradually become more confident in a soft landing for the economy.
“I think in general we’ve seen the economy hold up better than feared, so there’s more confidence that we are probably not going to get the bad debt cycle the market was concerned about,” he said.
NAB chief executive Ross McEwan recently said Australia would avoid falling into recession, while Westpac chief Peter King told The Australian Financial Review a soft landing looked “quite plausible”.
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