Goldman Sachs forecasts 20pc rise in bank earnings
The nation’s banks will benefit from a 20 per cent jump in earnings this year, before confronting spluttering growth in 2024.
The nation’s banks will benefit from a 20 per cent jump in earnings this year, before confronting spluttering growth in 2024, as home lending slows and competition for deposits becomes fiercer.
That’s the view of analysts at Goldman Sachs, who estimate higher cash earnings in 2023, buoyed by an ongoing rates mismatch being exploited by Australia’s listed banks. That happens as they refuse to pass on all of the increases in the cash rate to savers, while quickly passing through a spate of rate rises to borrowers.
The Reserve Bank oversaw eight rapid rate hikes in 2022, between May and the year’s end, as it sought to cool swelling inflation.
Goldman said the banking sector was likely to post combined cash profit of $35.5bn profit this financial year. The analysts are tipping the sector will post almost $36bn in combined cash profit for 2024.
Goldman said access to wholesale funding was a risk to Australia’s banks in 2023, warning a tightening of global credit markets could force the banks into a tussle for depositor funds, eroding potential profits. “We remain alert to the risk that these trends in wholesale markets result in a reinvigoration of deposit competition, with early signs suggesting this has already started to happen,” they wrote. “If the latter plays out, how banks respond on mortgage pricing will be the key to how (net interest margins) evolve.”
Clime Investment Management’s chief investment officer Will Riggall said while listed banks had experienced a stellar 2022, the end of the rate hiking cycle and potentially higher bad debts would act as an earnings headwind.
“We think banks will have another boost if volumes stay reasonable as customers roll off from their very low rates to the higher rates, but that will be the test for bad and doubtful debts,” he said. “We’ve been taking profits and rotating those funds into companies exposed to a reopening of China – minerals – topping up BHP and South32.”
Mr Riggall said Clime had recently sold its entire stake in Commonwealth Bank and reduced its holding in Westpac, but picked up more shares in ANZ.
Morgan Stanley analyst Richard Wiles said near-term prospects for the banks were positive but he expects a tougher operating environment in the second half.
“For now, margin expansion and resilient credit quality underpin the earnings outlook. However, the size and speed of the tightening cycle creates the prospect that weaker volume growth, declining margins, higher costs, and rising loan losses weigh on the banks’ share price performance in the second half of 2023,” he said.
Meanwhile, broker Jefferies told clients it expects CBA will report first-half cash profit of $4.95bn and may flag another share buyback when the bank reports earnings on February 15.
Analysts led by Brian Johnson said their profit expectations for CBA’s interim result was 3.7 per cent below consensus estimates, largely due to their view on revenue and loan loss rates. Mr Johnson highlighted CBA’s balance sheet strength and said a further capital return to investors was likely. “We flag prospects for a further CBA buyback with the present $2bn buyback near completed and better than peer forward (net interest margin) trajectory beyond the first half 2023,” he said.
Mr Johnson warned, however, the banking sector would confront a challenging period as mortgage volumes slowed.
“Given superior management execution and franchise CBA is operationally outperforming peers but (the) Australian bank macro outlook is deteriorating as rates rise, which will slow system housing credit growth from circa 8 per cent to 3 per cent as house prices fall.
“CBA has ceded h/h (household) deposit and home loan share rather than match sub-cost of capital pricing but inevitably CBA will have to respond.”
Jefferies – which downgraded CBA to underperform in November – said its share price at current levels was “too demanding”.
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