Three of Australia's four largest banks are expected to post gains in net income in their full-year earnings reports in the coming weeks, as higher interest rates support their margins.
ANZ Group Holdings Ltd. is expected to report a full-year net income of A$7.46 billion for the fiscal year ended Sept. 30, up from A$6.52 billion in the previous year, according to the mean estimate of analysts on S&P Capital IQ Pro. National Australia Bank Ltd. (NAB) is estimated to report a full-year net income of A$7.80 billion, up from A$7.10 billion, while Westpac Banking Corp. may post a net income of A$7.50 billion, up from A$5.28 billion.
Westpac, which is scheduled to report its full-year earnings Nov. 6, warned Oct. 26 that its net profit will be reduced by A$173 million due several factors, including an increase in provisions for customer refunds and restructuring costs, and a write-down of assets due to the reduction of its corporate and branch footprint.
NAB will report its full-year earnings Nov. 9 and ANZ will follow Nov. 13, according to information on the lenders' websites. Commonwealth Bank of Australia, Australia's largest lender by assets, follows a different financial calendar than its peers, with its fiscal year ending June 30.
"We expect Australian banks to maintain sound earnings in the next two years. Higher interest rates should support Australian banks' interest margins notwithstanding some decline from the recent highs," Sharad Jain, an analyst at S&P Global Ratings, told S&P Global Market Intelligence in an email.
The big four banks have benefitted from rising interest rates that boosted their net interest margins (NIM). The Reserve Bank of Australia has raised rates to the current level of 4.10 % since early 2022 after lowering its benchmark cash rate to a record low of 0.10% to assist the country's recovery from the COVID-19 pandemic. The central bank's board is set to meet on Nov. 7, and Governor Michelle Bullock said the Reserve Bank of Australia was prepared to hike rates further as it continues to keep inflation in check.
Analyst estimates on S&P Capital IQ Pro, however, indicate lower incomes at all four banks in the new fiscal year that began on July 1 for Commonwealth Bank and Oct. 1 for the other three lenders.
ANZ's NIM is estimated to rise to 1.72% in the fiscal year that ended on Sept. 30, from 1.63% in the previous year. Analysts, however, expect it to drop to 1.67% in the new fiscal year. NAB will also see an increase in NIM to 1.74% from 1.65% in the previous year, before dropping to 1.69% in the year that ends on Sept. 30, 2024. Westpac is expected to see its NIM increase to 1.98% from 1.87%, before falling to 1.88% in the year ending Sept. 30, 2024, according to the estimates.
While the banks' incomes were helped by interest rate movements in the last few quarters, the lenders face tougher competition in their traditional growth engine: mortgage lending. The four major lenders have indicated they will refocus capital and investment toward their business segments rather than mortgage lending.
"Mortgage lending has never been more competitive, and while we have ceded market share, recent declines reflect the conscious decision to be disciplined, and this is not the right time to take back share," Westpac CEO Peter King said during the bank's May 8 earnings call.
"Credit losses over the next two years should remain low; that is, at about pre-pandemic levels of 15 basis points," Ratings' Jain said. Customers should be shielded against the rising interest rate burden as Australia has low unemployment levels and modest economic growth, Jain added.
The banks are expected to see an increase in their nonperforming asset (NPA) ratios. ANZ's NPA is expected to climb to 0.33% in the year ended Sept. 30, from 0.16% in the previous year. Similarly, NAB's NPA ratio may climb to 0.23% from 0.15% and Westpac's to 0.25% from 0.20%, according to estimates.
"Higher interest rates will continue to constrain the debt-servicing capacity of households and businesses. This will suppress demand for credit and consequently the banks' earnings growth," Jain said. "Although not our base case, an elevated debt-servicing burden over the long term could also trigger a significant rise in credit losses, particularly if accompanied by a macro-economic shock."