The benefits of eight consecutive hikes to the cash rate from the Reserve Bank (RBA) are expected to be materialised by the Australian banking sector over the course of 2023, with further interest rate tightening projected in the near term.
Accordingly, net interest margins (NIMs) are tipped to bounce after slipping to record lows, with the major banks ending the 2022 financial year (FY22) with an average NIM of approximately 1.76 per cent, down from 1.87 per cent in FY21.
The improvement is expected to be reflected in the major banks’ cash earnings, which ended FY22 at a combined $28.5 billion.
The profitability boost has come despite concerns over credit quality, with the market fearing the consequences of rapid rate rises on loan serviceability and housing prices.
According to CoreLogic, home values have fallen 8.4 per cent from their May 2022 peak, with further declines anticipated throughout most of 2022.
However, the banks are yet to report material deterioration in credit quality.
Matthew Davison, portfolio manager at Martin Currie Australia reflected on the banking sector’s resilience to market uncertainty, supported by strong capital buffers.
“Banks were also one of the standout sectors through the 2022 August reporting season and November AGM period for upgraded revisions and share price performance,” he said.
“We are now seeing almost unprecedented top-line and pre-provision operating profit (PPOP) growth from the banks, and at least for now, impaired assets remain incredibly low.”
“…It seems that despite house prices continuing to fall throughout 2022, bank investors have now shrugged off earlier concerns, now focusing more on the peak in rates and evidence of consumers staying stronger for longer with adequate buffers to handle stress.”
But Mr Davison is expecting investor sentiment to wane as borrowers begin to feel the pinch from rising mortgage rates.
“…The pressure from rising interest payments and fixed rate mortgage maturities is still largely ahead,” he observed.
“We expect the debate for the banks’ sector earnings will swing back again as greater evidence for consumer pressure emerges.”
However, despite this “looming consumer pressure”, Mr Davison is projecting “solid” bank earnings in the near- to medium-term outlook, particularly off the back of continued “NIM tailwinds” throughout 2023.
“The sheer weight of recent credit creation in the system is also providing support,” he added.
“…We see that all these banks have ample exposure to rising rates and other factors that will support a positive P/E re-rating.”
