Australia’s biggest banks are facing a challenging first half of the year, with expectations of weaker profits on the horizon. High operating costs and intense competition in the mortgage and deposit sector are squeezing margins, leading to a possible reversal of the stock rally that has been observed in the sector.
Traditionally, the Big Four banks have been beneficiaries of rising interest rates. However, in the past year, they have had to sacrifice margins to write new home loans and pay higher rates to depositors. This has resulted in a narrowing of their net interest margin, putting downward pressure on profits. Analysts have noted that this trend may persist in the first half of fiscal 2024.
Analysts at investment and advisory firm Jarden have expressed concerns about further margin erosion in the upcoming months. They anticipate continued impact from deposit/mortgage competition, leading to adverse shifts in deposit mixes. The predictions are not optimistic, with expectations of margin decline and profit erosion for major banks like National Australia Bank, Westpac Banking, and ANZ Group.
National Australia Bank, the second-biggest mortgage lender in Australia, is expected to report a nine-basis-point narrowing in its net interest margin. Similarly, Westpac Banking and ANZ Group are also projected to experience a decline in margins and underlying profits. Commonwealth Bank of Australia, the largest lender in the country, is anticipated to announce a margin decline of up to 11 basis points and a profit decline of as much as 10%.
Stock Performance and Market Outlook
The recent stock rally in Australia’s banking sector, driven by expectations of rate cuts in response to tamed inflation, may be short-lived. Economic uncertainties and unfavourable data have led to a reassessment of market expectations. Analysts have downgraded their recommendations on Big Four shares, with some even suggesting a “sell” rating on certain banks. The market is now pricing in a small chance of a rate hike, adding further uncertainty to the outlook for the banking sector.
Australia’s biggest banks are facing significant challenges in the current economic environment. The combination of high operating costs, intense competition, and narrowing margins is expected to result in weaker profits in the upcoming months. Investors and analysts alike are advised to closely monitor the performance of these banks and adjust their strategies accordingly to mitigate risks associated with the changing landscape of the banking sector.
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