Aggressive RBA cranks up bank risks: analysts

Moderately higher interest rates should ease margin pressures, but the prospect of an aggressive tightening cycle by the RBA increases the risks for lenders.

An aggressive tightening cycle by the RBA could hit mortgage and housing demand, analysts warn. Picture: AAP Image

Moderately higher interest rates should initially ease margin pressures at Australia’s big four banks but the prospect of an aggressive tightening cycle by the Reserve Bank cranks up the risk of weaker housing and mortgage markets and could trigger a recession, analysts warn.

A day after the central bank raised rates for the first time in more than a decade and took a more hawkish stance than many had anticipated, banking analysts have weighed in, with most tipping an improved near-term outlook for lenders on the margin front.

“We believe that margin headwinds from lending competition and mix remained elevated in the March quarter but will start to reduce in the June quarter as the impacts of the 2021 fixed rate mortgage price war ease,” Morgan Stanley analysts led by Richard E Wiles said in a research note to clients.

JP Morgan analysts took a similarly positive view, saying higher rates would lift bank net interest margins in the near term, posing “upside risk” to the broker’s revenue and profit forecasts.

The anticipated turnaround comes after an extended period of compressed margins due to record-low interest rates and intense mortgage competition in recent years.

The big lenders were quick to hike mortgage rates by 0.25 per cent on Tuesday, matching the RBA’s move within hours.

Westpac and National Australia Bank, meanwhile, are the only two of the majors to pass on the cash rate rise to savers, with both moving to lift rates on select savings accounts.

Not so at Commonwealth Bank and ANZ, where mortgage holders have been slugged with the 0.25 per cent jump but savers have seen no change.

Indeed, ANZ chief executive Shayne Elliott, handing down the lender’s first-half result on Wednesday, was already forecasting improved margins in the current half as interest rates lift.

The lender in part expects margins to get a boost from a lift in deposits as the nation enters a new higher-rate era.

It comes after the lender’s net interest margins continued to decline in the first-half, down to 1.58 per cent compared to 1.65 per cent in the prior half, due to elevated costs and a rush on fixed rate home loans.

The bank’s cash profit dipped 3 per cent to $3.1bn in the half, with NAB and Westpac to follow with their own results in coming days. (CBA reports in August).

For Ord Minnett, the coming revenue and profit upside could feed through to banks’ fiscal 2023 and 2024 performance.

But much depends on how swiftly the RBA acts to curb spiralling inflation.

RBA governor Philip Lowe took a more hawkish stance in his comments on Tuesday following the lift in the official cash rate, flagging “further increases over months ahead”, and saying the RBA was “committed to normalising interest rates”.

This commentary has led some to lift their forecasts: Goldman Sachs, for example, now sees the RBA hiking by 50 basis points apiece in June and July.

A ‘gradual and measured’ tightening cycle would be the best scenario for the banks, Morgan Stanley analysts said ahead of Tuesday’s rate decision.

The slow-and-steady approach would see net margin benefits, solid loan growth, manageable costs, resilient credit quality, and support for relative price/earnings multiples, they told clients.

“As the cycle extends, we expect the incremental benefits to be partly offset by a combination of: front book mortgage competition; higher deposit betas via an increase in term deposit rates relative to the cash rate; a reversal of the 2020-21 deposit mix shift; and higher wholesale funding costs given trends in credit markets and the run-off of the RBA’s Term Funding Facility,” Mr Wiles’ team told clients.

“Our forecasts assume that the RBA lifts rates to 1.75 per cent in this cycle. All else equal, we estimate that every 25 basis point increase in the cash rate adds an average of around 3 basis points to the majors’ margins due to wider spreads on low-cost transaction accounts and capital.”

But these benefits could be tempered by an aggressive RBA, the analysts warned.

“A ‘quick and aggressive’ rate cycle creates more challenges including higher deposit betas, more volatile wholesale funding, a weaker housing and mortgage market, and greater recession risk.

“The latter scenario is looking more likely, increasing the tail risks for banks.”