Written by Roushni Nair
(Reuters) – Australia's biggest banks are expected to report their lowest earnings for the year next week, as investors focus on whether tougher competition in lending and rising deposit costs will outpace mortgage profits.
Earnings will be closely watched to see if the banking sector's share price rise of more than a quarter from late 2023 is justified, when the sector posts its strongest rally in nearly two years in July.
Although margins are stable, Australian banks face rising costs as depositors pour money into savings accounts that pay attractive rates and borrowers struggle to repay loans due to high interest rates.
“Banks have capital loss provisions to cover rising debt, and borrowers struggling with their mortgages are adjusting their financial situation by selling into a strong housing market,” consulting firm Morningstar wrote in a client note.
The Reserve Bank of Australia has held rates steady at 4.35% from November 2023 after a rapid increase of 425 basis points from May 2022. Markets expect the RBA to ease policy by the end of the year, although the central bank has retained the option of tightening.
Credit growth remains limited, as wages and population increase, due to reduced borrowing capacity and high inflation. Meanwhile, the fear of persistently high interest rates discourages discretionary spending.
As mortgage payments rise, borrowers face greater difficulty qualifying for a new loan or credit due to the impact on their credit-to-income ratio, which is an important metric for lenders evaluating creditworthiness.
Several hidden cost issues may emerge this reporting period, Citi analysts said, including regulatory spending and compliance with technology investments.
Westpac, Australia's second-biggest mortgage lender, is expected to report a 3% drop in annual earnings on Monday, according to market data aggregator Visible Alpha and other brokerages.
National Australia Bank (OTC:) (NAB) and ANZ Group are expected to tell a similar story with annual deposit interest rates of around 9% and 6%, respectively. NAB and ANZ, the second and fourth largest banks by market value, announced annual profits on Nov. 6 and 8, respectively.
Citi analysts anticipate challenges for ANZ's central bank as it faces “the negative impact of overseas downgrades ahead of more domestically focused peers”.
ANZ has a large international portfolio of retail banks, including a large share of the Pacific banking market.
The Commonwealth Bank of Australia (OTC:), which controls a quarter of the country's A$2.2 trillion ($1.46 trillion) mortgage market, is expected to post a two-point increase in first-quarter interest rates when it reports on Nov. 13, profits were seen rising 6.3%, according to analyst estimates.
($1 = 1.5225 Australian dollars)
