Goldman Sachs tips NAB and ANZ to weather bank profit hit

Aussie banks are predicted to see returns remain limited despite expectations interest rates will come down in 2024.

Banks are expected to see profits remain challenged despite expectations interest rates will come down over the course of 2024.

The nation’s banks are unlikely to see a significant lift in returns, with investment bank Goldman Sachs saying the sector would not benefit from any turn in the interest rates cycle.

In a note to investors on Thursday, Goldman Sachs analysts Andrew Lyons and John Li said Australia’s banks had an uncertain outlook, noting lenders with less exposure to the home market presented better opportunities to investors.

Banks have slugged it out in recent months in a bid to pinch market share, with the previous round of results revealing the pressure on profit margins.

Some banks had said rivals were writing loans below the cost of capital.

But Mr Lyons and Mr Li said banks now appeared to be earning about the cost of capital. “Therefore, further incremental pressures are likely to be muted, but we do not expect returns to dramatically improve,” they said.

The Goldman Sachs note said lending growth had “troughed” after years of breakneck growth, pointing to an inflection which may see growth recover to 5.4 per cent by June.

Mr Lyons and Mr Li said bank margins would trend nine basis points lower in the year, driven by higher wholesale funding costs and the need to offer higher ­deposit rates.

Goldman Sachs said ANZ’s and NAB’s margins could slump 10 basis points, while CBA’s could slide by nine basis points.

However, Mr Lyons and Mr Li said banks may have opportunities to boost margins on certain products by holding back changes, a move which could be supported by a lower-paced cutting cycle.

Economists had dialled in potential rate cuts in the year ahead after the Reserve Bank increased borrowing costs to fight inflation. Rates have lifted from their pandemic lows of 0.1 per cent to hit 4.35 per cent in November.

Several banks have dialled in expectations the RBA will cut rates by September, with Goldman Sachs pencilling in expectations of rates hitting 3.25 by June next year.

But Goldman Sachs said rate cycle cuts were “generally not good for bank” net interest margins, with deposits and spreads “likely to remain incremental headwinds” this year.

Goldman Sachs said ANZ and NAB were best positioned for the year ahead, marking the two banks as a buy, with the two lenders offering alternative income streams.

ANZ’s institutional arm was tipped as a potential profit driver, with the analysts noting the “evidence of success for ANZ in improving the profitability of its institutional business”.

NAB’s exposure to business lending also resulted in the bank holding its buy position.

Bank of Queensland was slated as a sell, with warnings the lender would struggle with ­margins.

“While the company’s transformation program is the right long-term strategy to deliver a strong and simpler bank, we believe it does leave the bank more exposed to inflation in third-party distribution costs,” Mr Lyons and Mr Li said.

The analysts noted BOQ’s volume momentum “remains weak”, with margin pressures unlikely to ease after already falling.

Clime Investment Management chief investment officer Will Riggall said the banks were facing an “anaemic” credit growth environment.

Mr Riggall said banks would struggle as interest rates started to trend down, noting their margins would be hard to maintain in the face of competition and government pressure.

“This cost-of-living inflation is a massive focus for the government and if a bank comes out and doesn’t give rate cuts, I think there will be problems there,” Mr Riggall said.