Fidelity International says major banks potentially won’t pass on full home loan rate cuts

Australian borrowers with the big banks could potentially miss out on rate cut relief from the RBA this year, says Fidelity International.

Major banks could try to protect their net interest margins by opting to not pass interest rate cuts expected this year from the Reserve Bank.

Financial services firm Fidelity International said the prospect that banks might not pass on rate cuts in full was a real possibility as net interest margins contract despite an aggressive run of rate rises in the past two years.

Economists at the big four banks all believe the RBA has finished with its rate rising cycle and that its next move will be to cut the current 4.35 per cent cash rate in the back half of 2024.

Fidelity International analyst and portfolio manager Zara Lyons said what could happen was that banks could decide to lower home loan rates by just 15 basis points if the RBA slashed the official cash rate by 25 basis points.

“It is a real possibility that we could see that,” she said. “It’ll be a game of chicken on who is the first bank who wants to upset everyone by being out of cycle in terms of not passing on rate cuts.”

Ms Lyons said that banks would be under pressure to not pass on full rate cuts to protect NIMs as earnings and profitability come under pressure in the year ahead.

“A decision to not pass on a full rate cut would help preserve their NIMs,” she said.

Net interest margins have come under pressure becauseof ongoing competition for deposits and customers switching to higher yielding deposit products.

ANZ in November reported that its net interest margin in the 2023 financial year fell from 175 basis points to 165 as a result of a seven-point impact from Australian and New Zealand housing loan ­pricing. Commonwealth Bank, Westpac and NAB have all reported contractions in recent months.

While markets have priced in no further rate rises ahead of reporting season, Ms Lyon said that a surprise rate increase next week by the RBA would disrupt share prices.

“If there was a rate hike, it would certainly take the edge off the pre-expansion (in price to earnings ratio) that we’ve seen and create a bit more volatility in the share price,” she said.

“The market has moved to a soft landing, so should we have a rate rise it would then put the cat among the pigeons in terms of making people a bit more jittery around what the RBA has seen versus everyone else.”

Australians households could see interest rate cuts later in 2024. Picture: Jonathan Ng

Westpac, National Australia Bank and ANZ have all announced buybacks of shares in the past several months, which Ms Lyons said would be tested this reporting season as to whether the earnings validate the PEs that banks have been trading on.

She said that markets would be watching for signs about the quality of borrowers that banks have been lending to.

“The other dynamic to factor in will be credit quality, and so far we’ve had a fairly benign experience in terms of sort of businesses failing and so on, and that reflects partly the fact that the banks have become a lot tighter around their lending and credit risk application for quality,” she said.

Fidelity International expected that banking share prices would be range bound in 2024 because of earnings declining coupled with strong wage growth, expenditure on technology and the stabilisation in rates and funding costs.

Meanwhile, Macquarie analysts said there was scope for guidance upgrades from the companies this reporting season, but it expected more dominoes to fall as optimism pushed some stocks too far ahead of earnings.

“With the (US Federal Reserve) Fed expected to cut rates this year, investors are already looking past the earnings decline in FY24 to a potential recovery in 2025,” they said.

“Given macro headwinds, we suspect guidance last reporting season was conservative. Growth has probably held up better than initially feared.”

Analysts at the financial group noted that there were more guidance upgrades than downgrades during the most recent annual meeting season, which it suggested mean better-than-expected conditions.