By Scott Murdoch and Lewis Jackson
SYDNEY, Feb 8 (Reuters) - A run of strong earnings and
stock market outperformance at Australia's "big four" banking
giants is set to fade later in 2023, investors said, as funding
costs rise while a cooling economy portends slower credit growth
and more bad debt.
Commonwealth Bank of Australia (CBA) , ANZ Group
Holdings Ltd , National Australia Bank Ltd (NAB) and Westpac Banking Corp are on track to book
huge profit in their current financial years as the economy
booms and rising interest rates reflate margins.
The biggest of the four by market capitalisation, CBA, is
forecast to grow net income 4% in its first half, Refinitiv data
showed. The rest are set for mid-teens growth or higher.
Reflecting that performance, financial shares outperformed the
broader stock index last year, down 2.7% versus a 5.5% decline.
But investors said bank performance will soon peak as costs
increase and rising unemployment translates into fewer new loans
and more bad debt.
"The upcoming results (season) will be as good as it gets,"
said Jun Bei Liu, who manages the A$1.2 billion ($836 million)
Tribeca Alpha Plus Fund.
Net income at CBA is forecast to slump to 1.3% in financial
year 2024 from 6.2% forecast for the current financial year. The
other three will shrink further, and go negative in the case of
ANZ.
The economy is forecast to slow from mid-2023 at the same
time as roughly A$350 billion in home mortgages move from fixed
to variable interest rates. The central bank estimates
two-thirds of fixed-rate borrowers will see mortgage payments
jump at least 40%.
A weaker economy, higher rates and accelerating inflation
should see credit growth halve in 2023, said ANZ economists.
The housing market is already a problem, with prices down 9%
since April, showed data from CoreLogic, the quickest decline
since its records began in 1980. The "big four" control
three-quarters of the mortgage market where the value of new
loans fell 29% last year.
Funding is also getting pricier. Over the next 17 months
banks must repay A$188 billion in almost interest-free loans the
central bank made during the COVID-19 pandemic.
"For the banks, they are in a period of juicy earnings but
as you get into the back half of 2023 things will start to slow
and earnings growth could turn negative," said DNR Capital
Managing Director Jamie Nicol, whose fund has A$7 billion in
assets under management.
Some investors said the worst is unlikely. Any downturn is
likely to be mild and even if margin growth slows, higher
interest rates should support margins at healthy levels for
months.
The Reserve Bank of Australia on Tuesday raised its main
policy rate by a quarter-basis point to a decade high of 3.35%,
and flagged further increases.
Macquarie Group Ltd on Tuesday said its home loan
business - the country's fifth largest - grew in its third
quarter and that it expects more growth, though higher costs.
The banks will soldier through a mild downturn, said Joseph
Koh, portfolio manager at the Schroder Australian Equity Long
Short Fund.
"There's always that bogey man of bad debts, but that's a
really left field scenario and we don't think that's the base
case," said Koh.
Still, local money managers remain lukewarm while bank
stocks trade at price-to-equity ratios in the teens, well above
foreign peers, with J.P. Morgan analysts estimating those
managers' holdings of major banks at near a nine-year low.
Retail investors make up nearly half the shareholder
registry, as they are traditionally attracted to the sector
because of its high and sustained dividend payout ratio.
"They're (banks) very leveraged to the economy and we're
coming into a soft patch. Earnings will be challenged. They're
almost trading at all time valuation highs as the economy is
heading into a slowdown. It's quite unusual," Tribeca's Liu
said.
Commonwealth Bank will report half-yearly earnings on Feb.
15, whereas ANZ, NAB and Westpac will issue quarterly trading
updates on Feb. 9, 16 and 17, respectively.
($1 = 1.4353 Australian dollars)
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Bank earnings to soar this year before falling sharply ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Scott Murdoch and Lewis Jackson; Additional
reporting by Sameer Manekar and Harish Sridharan; Editing by
Praveen Menon and Christopher Cushing)
@lewjackk))
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