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Headwinds Versus Tailwinds For Banks in 2023

Australia | Feb 02 2023

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

A slowing housing market continues to place pressure on banks to offer competitive pricing to borrowers, limiting upside ahead, but some brokers believe ongoing strength in net interest margins could offset impacts.  

-Brokers weigh head and tailwinds in assessing outlook for banking sector
-Competitive mortgage pricing to linger with mortgagees set to switch from fixed to variable rates over the coming year
-Upside potential does remain as net interest margins continue to rise, with a peak anticipated in the second half

By Danielle Austin

Given ongoing volatility and offsetting factors, the market remains divided on whether banks can continue to outperform or if they have passed their peak. Despite anticipating solid first half results across the sector, Jarden expects the first half will be as good as it gets for the banking industry, with falling house prices, moderating volume growth and an anticipated end to the rate hike cycle limiting further upside. 

The broker anticipates material net income margin (NIM) growth in the first half and remains 2-3% ahead of consensus profit forecasts, but feels margins are likely nearing a peak and benefits are largely accounted for in share prices.

With its focus on the sector outlook, Jarden prefers National Bank ((NAB)) ahead of ANZ Bank ((ANZ)), Westpac ((WBC)) and Commonwealth Bank ((CBA)). 

On the other side of the argument, Citi currently retains a positive view of the banking outlook, despite acknowledging that 2023 is shaping up to be a tougher year for the sector. This broker believes banks will be able to deliver a third consecutive year of outperformance. 

Citi outlined three factors that it sees as potentially providing surprise upside. Firstly, it notes NIMs continue to rise, and retain headroom for growth ahead of a likely peak in the second half. Secondly, strong growth in large business lending remains persistent amid a fragile market. And thirdly, loan provisioning should provide a buffer from the profit impacts on declining asset quality. Accordingly, Citi sees potential 7-10% upside risk to consensus earnings estimates for the majors, but considers there to be limited earnings upside for regional banks. 

This broker expects a fourth quarter share price rally has increased concerns around tougher conditions over the coming year, which it feels may be unwarranted. Citi prefers ANZ  ahead of Westpac and NAB, while, like Jarden, CBA is its least preferred pick. This broker expects the latter two will face a tougher share performance over the year. Within regionals, it prefers Bendigo & Adelaide Bank ((BEN)) over Bank of Queensland ((BOQ)).

Competition for mortgage market share remains intense 

With mortgage growth slowing, a by-product of the ongoing rate hiking cycle, banks are increasingly looking to make offerings competitive in a bid to retain market share, and feeling the impact of pricing pressures as a result. Not only is mortgage competition intense, but Jarden expects it will only increase as the housing downturn continues. 

According to Jarden, ANZ has emerged as a beneficiary of this competition over recent months, with improvements in the bank’s performance driven by a combination of improving volumes and broker experience rather than pricing. Conversely, it feels ANZ’s growth comes at the expense of NAB, which has reported a slowdown in volumes but has also been less competitive on pricing than peers. At the margin line, Jarden anticipates mortgage competition to prove less of a drag on NAB and ANZ than on their peers. 

Macquarie similarly sees competitive mortgage pricing as posing risk to margins, and highlights that further margin compression is a real risk with 25-30% of mortgages set to switch from fixed to variable rates by 2024. In agreement with Jarden,  Macquarie finds CBA and Westpac among the majors, and Bank of Queensland among the regionals, most exposed to margin headwinds. 

Macquarie expects banks will deliver their strongest revenue performance in decade off the back of rapid rate rises over 2022, but feels potential earnings strength has been captured in stock prices and remains Underweight on the sector seeing limited upside to valuations. 

Buybacks and dividend growth

Morgan Stanley anticipates the banks will not announce further buybacks in 2023, after the majors collectively undertook $18bn in buybacks over 2020 and 2021, with CBA and NAB still having $0.2bn and $0.4bn remaining of their buybacks respectively.

However, while this broker expects new buybacks are unlikely before 2024, it does anticipate 9% average dividend growth across the sector, before being flat year-on-year. Among the majors, Morgan Stanley predicts ANZ dividends lift 1%, CBA’s 17%, NAB’s 10% and Westpac’s 9%, with both CBA and NAB’s dividends returning to pre-covid levels.

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CHARTS

ANZ BEN BOQ CBA NAB WBC

For more info SHARE ANALYSIS: ANZ - ANZ GROUP HOLDINGS LIMITED

For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED

For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION