The four big banks saw their net interest margins increase in the second half of 2022, fuelled by the eight successive interest rate hikes and the economy’s state in the wake of COVID-19 outbreak.
While the higher interest rate environment will continue to support margin recovery, banks are in for a potential economic downturn, inflationary pressures, and house price falls in the new year.
On Dec. 6, the Reserve Bank lifted its benchmark cash rate target for the eighth-time to a record-high 3.1%. This, as GDP grew 0.6% in the September quarter compared to a 1.9% contraction the prior year, according to ABS, and with inflation remaining high at 6.9% year-over-year in October.
“A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around 8% over the year to the December quarter,” RBA Governor Philip Lowe said in the policy statement.
If inflation persistently stays high, it may force RBA to continue its tightening.
“We think lending will continue to fall, and property prices will continue to pull back as they traditionally do when a central bank is raising rates,” Amir said. “We think householders have not yet felt the full impact of rate rises, and some households are under financial duress with our nation having one of the highest debt-to-income ratios in the world.
“This means banks will be concerned their margins will likely continue to fall, perhaps across 2023, as the lag effects of rate hikes and inflation bite. I also see bad debts (provisions) continuing to rise, and that could be a dominant theme of the earnings season in February and August next year.”
CoreLogic data showed national house prices slipped 1% in November from the previous month; while recent ABS data showed that in the June quarter, the total value of dwelling units in Australia fell to $9.674 trillion from $10.033 trillion – the largest quarterly fall since the bureau started tracking the total value of residential homes in September 2011.
“Focus of the banks will be margin control and cost control in a low growth but higher rate environment,” Martin North, principal at Digital Finance Analytics, told S&P Global Market Intelligence. “They are highly exposed to a property downturn and rising international funding costs. I expect to see higher provisions from bad loans in the higher rate environment, and I expect profit will be hit. They will try to save on the cost side — especially with accelerated branch closures and staff reductions.”
The falling prices could come as a shot in the arm for Aussie households.
“A potential upshot is that the RBA is correct; inflation will retreat, and concerns over debt serviceability have been overstated,” Matt Simpson, senior market analyst at City Index, told Market Intelligence. “This could see demand for housing pick up, and banks outperform the broader market next year after a lacklustre (yet volatile) 2022.”
Banks may have to squeeze their lending margins and APRA may loosen home lending standards, although these, Simpson said, would raise banks’ risks that the regulator is trying to reduce.
According to a Bank of Queensland spokesperson, all Australian banks are feeling the effects of increasing rates and declining house prices.
“The changing market dynamics are already being seen in reductions in customers’ borrowing power and slowing market demand for new credit,” the spokesperson said.
Although house prices are falling, this followed a period of rapid house price appreciation, with house prices peaking in April 2022 – they have since dropped to levels seen in mid-2021.
“Banks are entering this period in a stronger position in terms of capital, liquidity, and strength and quality of credit than they’ve been in for a very long time, thanks to the regulatory reform agenda and also to conservatism that was applied through the global pandemic,” Doug Nixon, EY Oceania banking and capital markets leader, told Market Intelligence. “This means that banks have a much broader suite of levers to pull and position for in this turbulent period than they’ve had in living memory.
“Competition and a constrained market will continue to drive focused strategy for market share and liquidity. More than ever, we’ve got non-traditional players vying for space in the market that may not be a level playing field. This not only creates a complex, competitive environment but also has the ancillary effect of pushing risk into less illuminated parts of the financial system.”
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