Australian Banks: Of Rates And War

Feature Stories | Mar 10 2022

Brokers agree Australian banks are set to benefit from eventual RBA rate rises, as long as they don’t lead to recession.

-War to put further pressure on inflation
-RBA remaining patient
-Banks a safe haven as long as economy copes
-Competition remains fierce

By Greg Peel

Back in November last, ANZ Bank ((ANZ)), National Australia Bank ((NAB)) and Westpac ((WBC)) reported full-year earnings, while Commonwealth Bank provided a September quarter update.

Despite the general relief felt at the time, having come out of delta lockdowns, the banks’ earnings results were disappointing. Westpac and CBA suffered significant share price falls on the day of their releases.

The reasons for the banks missing analyst forecasts could be summed up in one word: competition. Remember when politicians would constantly accuse the Big Four of being an oligopoly of collusion?

With the RBA cash rate at zero, the banks were forced to offer historically cheap fixed rates on mortgages in a surging housing market. Deposit rates on offer were almost zero, so there was nowhere further to go. Hence the spread between the rate banks could borrow at, and what they were offering to lend at (net interest margin), was compressed – more so than analysts had feared.

A bank could choose to maintain a higher net interest margin (NIM), but risk losing market share. It could offer the lowest rates in the market, but suffer on the revenue line. Between the Big Four, a balance played out, but they all lost.

What’s more, they weren’t the only lenders in town. Aside from competing between themselves and with the smaller regional banks, they were competing with new fintech players – online services with comparatively minimal costs.

And it wasn’t just a case of fintechs moving into the banks’ traditional lending space – the banks were competing with superior, up-to-the-minute technology. The stalwarts were forced to play catch-up on the IT front. Hence bank costs were greater in the period than analysts had forecast, which impacted further on earnings.

The good news was solid capital positions still allowed the banks to offer attractive dividends, and even fund share buybacks. The bad news was analysts could see no change to the sector’s prospects in FY22 (June-end for CBA, September-end for the other three). Indeed, they all assumed things would likely get worse before they got better.

The only saviour will be RBA rate rises, all agreed. At that point in time, the RBA was sticking to a 2024 expectation of the first rate rise, while the market was pricing in 2023. Hence analysts assumed NIM relief was ahead, but not until FY23.

Much has changed in the meantime.

War and Pestilence

In 2021, it was expected that the surge in inflation that began early in the year, due to covid-driven supply and labour constraints, would ease as vaccines were rolled out across the globe. Inflation, it was assumed, would be “transitory”, and would soon settle back. Then came delta.

Okay, it might take a bit longer, it was agreed. Then came omicron.

Suffice to say, by late last year the Fed had abandoned its “transitory” assumption and in January this year, delivered a complete policy about-face that sent global financial markets into turmoil.

That turmoil had Australian banks share prices plunging along with everything else. But With the Fed flagging the first rate rise(s) in 2022, rather than the 2024 also previously guided, it was assumed the RBA would soon have to follow suit. The rate rises bank analysts had been touting as a saviour for Australian banks in FY23 were now an FY22 proposition.

The banks had already begun to incrementally raise their rates.

Bank share prices bounced hard, until they released their results in February. Only after that did Russia invade Ukraine.

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