Big banks face earnings squeeze but dividends could still shine, says JPMorgan

JPMorgan’s banking analysts say big Aussie lenders are likely to easily meet expectations, maintain or increase dividends and that ANZ may even trigger a share buyback worth up to $1.5bn.

ANZ may consider a share buyback of up to $1.5bn. Picture: Luis Enrique Ascui

Big bank core profits are likely to dip by up to 3 per cent in the first half of 2024 but a possible surprise on bad debt provision charges could deliver a modest earnings jolt, according to JPMorgan analysis.

National Australia Bank will be first to report its interim 2024 earnings on Thursday, followed by ANZ and Westpac the next week. The largest, Commonwealth Bank, has a different financial calendar and will report third-quarter earnings on May 9.

JPMorgan’s banking analyst team, led by Andrew Triggs, said the big Aussie lenders were likely to easily meet expectations, and maintain or even increase dividends.

He said there was even a possibility of ANZ triggering a share buyback worth up to $1.5bn to match similar capital management programs by its peers.

“The majors head into 1H24 reporting with decent prospects of holding consensus earnings per share at current levels, or seeing small bad and doubtful debts-driven upgrades,” Mr Triggs wrote to clients in a note this week.

The broker expected NAB’s net interest revenues – excluding trading income – to have likely fallen 1 per cent in the six months ending December 31. This was despite a welcome respite in the mortgage war that has driven the slide in profit margins across the sector.

“We expect net interest margin trends to be negative again this half with pressures from mortgage competition and funding costs to more than offset replicating portfolio benefits,” JPMorgan’s banking research team said.

Net interest margin (NIM) is the key bank profitability gauge that measures how much the interest a bank receives on loans exceeds what it pays to depositors.

JPMorgan would be “looking for evidence of reducing NIM pressure” and has modest expectations that it hopes the banks will be able to exceed.

It predicted NIMs falling 4 basis points to 1.61 per cent at ANZ, 8 basis points to 1.86 per cent at Westpac, and 2 basis points to 1.69 per cent at NAB. Core NIM, which excludes the markets segment, is likely to fall 4 basis points at NAB and ANZ during the half, and 5 basis points at Westpac, it said.

Westpac releases its interim earnings for 2024 next week. Picture: Luis Enrique Ascui

The broker was not as negative as other peers on the big banks’ shares, despite considering their price “expensive” after outperforming the broader market so far this year.

It has an “overweight” call on NAB, “neutral” on ANZ and Westpac, and its only “underweight” call is on CBA shares. This contrasts with brokers at Citi and Macquarie, who recently moved to downgrade all big banks to sell.

“All three banks gave some form of (first quarter) trading update, with each performing slightly better on NIM than we expected,” Mr Triggs said. “The first half of fiscal 2024 … will see similar trends.”

Funding cost improvements in the term deposit market could benefit the bank’s coffers.

“Spreads to cash on medium and long-term term deposits (TDs) have improved slightly in recent months. Consistent with this, we expect NAB to show its portfolio TD cost has peaked in recent months,” the broker wrote.

JPMorgan expected cash profit after tax for NAB to be down 3 per cent compared with the previous half at $3.5bn, and the dividend 1c higher than a year earlier at 84c per share.

For Westpac, JPMorgan forecasts a 3 per cent dip in core net profit to $3.4bn, and an interim dividend of 72c per share, 1c higher than a year earlier.

ANZ’s cash earnings would likely fall 1 per cent to $3.6bn during the half, but the lender should maintain its interim dividend at 81c per share, according to JPMorgan.