Australian banks face persistent margin pressure amid falling rates, competition

Major Australian banks will likely face increased pressure on their margins amid falling interest rates and stiff competition after posting mixed results for the six months ended March 31.

The Reserve Bank of Australia (RBA) is expected to cut its policy rate further after reducing it to 4.10% in February. While the RBA kept its rate unchanged at 4.10% in April, it said underlying inflation continued to ease in line with its earlier forecasts. Still, the RBA said it was cautious as it needed to be confident that the progress would continue so that inflation returns to the midpoint of its 2%–3% target range.

Market observers expect the RBA to deliver more policy rate cuts this year. Competition in the housing sector also remains intense.

National Australia Bank Ltd.'s cash earnings for the fiscal half fell 2.3% year over year to A$3.41 billion, with its net interest margin contracting 3 basis points (bps) to 1.69%, according to data compiled by S&P Global Market Intelligence. Similarly, Westpac Banking Corp. posted a 0.6% drop in earnings to A$3.32 billion. ANZ Group Holdings Ltd. logged a 6.7% increase in cash earnings for the period to A$3.64 billion. Both Westpac and ANZ posted a 1 basis point fall in net interest margin.

Commonwealth Bank of Australia follows a different financial calendar than its peers, with its fiscal year ending June 30. The biggest Australian bank by assets reported cash earnings of A$5.13 billion for the six months ended Dec. 31, 2024, up 7.8% from a year ago.

The four major Australian banks' net interest income reached a record high of A$38 billion (excluding acquisitions), yet the net interest margin continues to be under pressure, falling about 1 basis point half-on-half, PwC Australia said in a report.

"Margin compressions were partially offset by loan growth, which came in at 5.1% on an annualized basis," according to the report.

Australia's GDP grew 1.3% in the 12 months ended Dec. 31, 2024, according to a March 5 release from the Australian Bureau of Statistics.

The Australian 3-year government bond yields rose to 3.66% from 3.60%, while the 10-year yield rose to 4.54% from 4.47%, said Imre Speizer, head of New Zealand strategy for Westpac, in a May 15 report.

"Markets price a 100% chance the RBA cash rate, currently at 4.10%, will be cut by 25 basis points at the next meeting on May 20, and 3.5 more cuts in this easing cycle," Speizer wrote.