Market eyes ‘purple patch’ for banks, tipping $28b in profits

The big four banks’ combined full-year profits are expected to exceed $28 billion, as rising interest rates help the country’s biggest financial institutions rake in higher revenue while bad debts remain subdued.

Investors are gearing up for a strong round of bank results in the coming weeks, with analysts forecasting ANZ Bank will deliver full-year cash profits of $6.3 billion when it kicks off the sector’s reporting season on Thursday.

Investors expect a sharp rebound in banks’ net interest margins.Credit:Paul Rovere

Westpac, which reports early next month, is tipped to notch up $5.4 billion for the year to September, and National Australia Bank is forecast to deliver $7 billion when it reports in the same week.

Commonwealth Bank – which operates on a June financial year – has already reported $9.6 billion in full-year profits in August, but analysts expect the September quarter was a particularly strong period for banks, as a series of interest rate rises took effect. Macquarie also reports its half-year numbers on Friday, with analysts expecting about $2.2 billion in cash earnings.

Opal Capital portfolio manager Omkar Joshi said the key focus for bank investors would be on margins, which are expected to have benefited handsomely from the limited pass-through of official interest rate rises to depositors. Banks’ earnings were also likely to be supported by very low bad debts, Joshi said, with the slowing economy not expected to cause stressed loans for banks until about next year.

“I think banks are probably in a bit of a purple patch on the margin side of things,” Joshi said. “Going forward, are they going to have to pass more of that on to depositors? Maybe, but as it currently stands deposit margins are in a very good spot for them.”

Last year, the big four made $26.8 billion in combined cash earnings, helped by cuts to COVID-19 provisions.

A dominant theme for bank investors this year has been the outlook for net interest margins (NIM), which compare bank funding costs with what they charge for loans, and are a key driver of profitability. Net interest margins are expected to rise sharply because banks have been quick to pass on 2.5 percentage points in official rate rises to mortgage customers in full, but the rises in deposits have been far more patchy and slow.

JP Morgan analyst Andrew Triggs predicted ANZ would post the strongest pre-provision profit growth of the big four, saying it had more exposure to New Zealand and the US, where interest rates were rising faster than in Australia.

Despite the expected expansion in margins, Jefferies analyst Brian Johnson noted bank shares had also rallied sharply in the plst month as investors priced in the good news. Westpac shares are up 10.8 per cent in the last month, ANZ shares are up 9.3 per cent, NAB has risen 7 per cent, and CBA has gained 6 per cent.

Johnson pointed to the potential longer-term challenges facing bank shares if the economy suffers a downturn next year, which would likely result in weaker credit growth and higher bad debt costs.

“I understand why they’ve gone up in the last month, but I think the risk is they are quite a bit lower in a year’s time,” Johnson said.

Barrenjoey analyst Jonathan Mott predicted a sharp rebound in margins, noting recent positive guidance from Bank of Queensland, and said loan quality would be “pristine”.

“This is likely to be a reporting season for the bulls, as was seen with BOQ’s NIM commentary,” Mott said.

Even so, Mott said 2023 could be more challenging for banks as rate rises started to have a more pronounced impact on the economy. Mott added banks would be sensitive to the reputational risk of posting sharply wider margins at a time when many customers were facing financial stress.

ANZ on Friday said its results would include a $113 million charge because of factors including compensation and restructuring costs.

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