Australian banks can expect their margins to improve further as interest rates drop from near zero, but inflationary pressures will push up costs and the quality of their assets could deteriorate if the economy slows down.
Australia and New Zealand Banking Group Ltd., or ANZ, Westpac Banking Corp. and National Australia Bank Ltd., or NAB, reported year-over-year increases in cash profit for the second half ended Sept. 30, helped by higher net interest margins from the six months previous ones. ANZ’s NIM rose to 1.68% in the second half of the financial year from 1.58% in the first half. NAB said its NIM in the six months to Sept. 30 was 1.67%, down from 1.63% in the prior half.
However, all three banks reported lower NIMs for the year compared to the year ended September 30, 2021.
The Reserve Bank of Australia cut rates in 2020, taking its benchmark rate to a record low of 0.10% by the end of the year to stimulate an economy that the COVID-19 pandemic has dragged down. down. It has raised the rate seven times in 2022, with the latest hike on Nov. 2 taking the benchmark to 2.85%. The increases came as global central banks tightened monetary policy to curb inflation. On November 2, the US Federal Reserve raised interest rates by 75 basis points for the fourth consecutive time this year, taking the benchmark federal funds rate between 3.75% and 4.00%.
“Margins are beginning to benefit from recent increases in cash rates and better returns on equity and deposit investments, inflationary pressures are driving up operating expenses and credit stress remains low,” said Nathan Zaia. , equity analyst at Morningstar, to S&P Global Market Intelligence. “We expect margins to continue to improve as rates continue to rise and fixed rate loans mature. Revenue growth is expected to outpace both operating expense growth and a gradual increase in loan losses,” Zaia said.
Aussie banks likely to benefit from rate hike cycle ‘for a while’ ANZ CEO Shayne Elliott said during the bank’s October 27 earnings call. The first-half environment that began Oct. 1 will be margin-friendly, but “we expect any changes from here to be more modest,” Elliott said.
NAB also expects further gains from higher interest rates in fiscal 2023. “We expect the benefit to NIM from cash rate increases to peak in the first half of 2023 with a more modest rise thereafter,” NAB Chief Financial Officer Gary Lennon said at the bank’s Nov. 8 meeting. call for earnings. NAB reported that its NIM rose to 1.72% in the fourth quarter from 1.62% in the previous three months.
Still, banks have signaled the possibility that rapidly rising rates will dampen demand for loans, especially if the economy slows. With inflation still a concern around the world, most analysts and banks expect central banks to continue climbing, even as the pace of increases deteriorates.
“Cost of living pressures are starting to have a significant impact and the next six months will be trying,” said ANZ’s Elliott. “This is particularly a problem for first-time homeowners who are just beginning to build up their equity as well as those with less stable employment.”
Westpac CEO Peter King warned in the bank’s annual results announcement on November 7 that the impact of rising rates will be felt by consumers in 2023.”House prices have fallen in recent months and this will continue into 2023. Credit growth is expected to slow. GDP growth will slow and unemployment will rise,” King said.
The IMF expects economic growth to slow to 1.7% in 2023, from 3.7% expected this year, and advised national authorities in a November 15 report to continue monetary and fiscal tightening to rebalance domestic demand and keep inflation expectations anchored.
“Inflation should also continue to put pressure on majors’ cost bases and, if interest rate hikes continue apace, the potential economic slowdown, rising unemployment and lower prices real estate could present a more challenging landscape for the majors,” auditing and advisory firm KPMG said in a Nov. 9 report on the annual results of major banks.
Australia’s economy is strong and households have enough savings reserves to weather the effects of higher rates, KPMG said. “These buffers could be tested in the coming months as the impact of rate hikes begins to hit borrowers,” the report said.