Banks continue to face challenges
Australia | 10:00 A.M
Banks may have excess capital and appear to be well shielded from deteriorating asset quality, but deteriorating macro sentiment and low interest rates pose a challenge
-The interest rate outlook has become bearish for banks
– Loan-reluctant companies and banks have excess funding
– Macro environment should drive sentiment among banks
By Eva Brocklehurst
Are clouds forming over the expected economic recovery in Australia? FY22 has started with severely limited lockdowns in major capital cities that go beyond what was originally expected and prompt brokers to reassess the outlook for banks.
Is the market underestimating the credit risk in the loan books? That’s likely not to be the case as JPMorgan believes prolonged lockdowns can hurt asset quality for small and medium-sized businesses, but provisions for banks look pretty solid.
While expected conditions will worsen from the “unusually rosy picture” that existed prior to the lockdown, Citi agrees that banks are well prepared. Strong asset prices isolate any risk, and ongoing retirement planning has high latent capacity.
Nonetheless, the emerging threat of stalled economic dynamism and a delay in the schedule for higher rates has made the broker more pessimistic about banks.
On the other hand, the decline in loan-to-value ratios will protect the balance sheets and iIt would take a combination of high unemployment and a serious collapse in house prices to inflict material losses on banks.
Even after the recently announced buybacks, excess capital still provides a buffer against possible deterioration in credit performance. Credit Suisse notes the decrease in credit risk weights in the June quarter as banks saw an improvement in portfolio quality. The major banks’ average credit risk weights were 33% in June 2021, compared to 37% in June 2020.
Bell Potter agrees that banks can handle the pandemic well by having net interest margins in the range of 2%, returns on equity of 10-12%, and loan growth to around the 1x system supported by capital ratios of 11-12%.
This implies Commonwealth Bank ((CBA)) stays at the top of the pack, followed by ANZ Bank ((ANZ)), in the opinion of the broker. Bell Potter estimates that its wealth quality metrics are in line with expectations, with the lowest for the Commonwealth Bank.
If house prices continue to rise, Macquarie suggests that pent-up needs could lead to better prospects for credit growth in 2022. That’s an “if,” and in the short term, the broker suspects that credit growth has slowed.
APRA reported that household system deposits rose more than 2% in July, amid rising tax refunds and lower spending due to increased conservatism.
For comparison, Morgan Stanley notes that household deposits in July 2020 rose from just $ 12 billion in July 2019 to $ 31 billion Bendigo & Adelaide ((BEN)) and Bank of Queensland ((BOQ)).
Corporate lending continues to rise, up 6% in July, less than in June but more than in April and May. Still, APRA has found that prolonged bans negatively impact business confidence.
Wilsons has also become less optimistic about banks after a period of sustained outperformance. The broker points to improved system-wide credit growth, pressure on net interest margins from lower interest rates, and worse than expected trade / market returns.
So will the resurgence of the delta variant hinder economic recovery even after vaccination limits are reached? Citi thinks this is more than likely.
Consequently, the main risk to banks is not the provisioning for bad debts or the capital concerns that have plagued the market in recent years, but rather the effects of continued monetary stimulus.
Monetary stimuli delay interest rate hikes, weigh on demand for credit and protection, and ultimately affect core earnings. This will inevitably manifest itself in bank stocks. The broker points out that the comments on Australia dodging a technical recession in the June quarter are really about the technical part as 2021 is very different from 2020.
Information from Credit Suisse Variable rate mortgages are back in vogue following the recent rise in fixed rates. Westpac is the only major bank that currently offers a variable interest rate of less than 2%, -70 basis points cheaper than comparable major banks.
ANZ Bank has the highest variable interest rate of the majors at 2.72%. In the meantime, the fixed interest rates for four- and five-year terms have been raised by 30 basis points. JPMorgan is particularly concerned about ANZ Bank’s difficulties in the Australian mortgage market and believes that a turnaround will take longer than initially thought.
In contrast, National Australian Bank ((NAB)) shows dynamism and more stable margin trends compared to its competitors. There is also less headwind for its dominance in corporate lending. The broker expects the pressure on mortgage margins to be the most affecting Commonwealth Bank over the next several years Westpac ((WBC)).
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