Australia | Feb 02 2023
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.
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