Higher rates deliver record profits for banks, customers resilient

The painful increase in interest rates that is hurting homeowners has pushed banks’ cash profits to a record high, but they face headwinds in coming years, EY and PwC warn.

The painful increase in interest rates that is hurting homeowners has pushed banks’ cash profits to a record high of $32.5bn, leading to higher dividends for investors. But with intense competition, a challenging credit growth environment and increasing cost pressures due to higher inflation, profits in coming years will be harder to achieve, even with higher rates, analysts said.

Higher interest rates usually deliver a boon to banks, as they can position to extract higher margins from their deposit holding and lending operations.

In this environment, however, banks are having to compete for a shrinking customer base, as a wave of cheap fixed-rate mortgages mature at the same time as credit growth slows.

ANZ on Monday became the last of the big four banks to unveil its yearly profits, revealing cash earnings rose 14 per cent to a record $7.4bn.

But just as with its three peers – Commonwealth Bank, Westpac and National Australia Bank – ANZ’s record result for the year masks a fall in cash profits in the second half, as some of the benefits of higher interest rates slip away.

“It is very much a tale of two halves,” Doug Nixon, EY banking and capital markets leader in Oceania said. “The story in the second half of results is pointing to more challenging times ahead.

“Those results showed that net interest revenues have peaked and declined in the second half, and future revenue and earnings are likely to moderate in response to economic headwinds, slowing loan momentum, inflation, and all those resulting competitive pressures.”

An analysis of the big four banks by financial services firms EY and PwC shows the banks’ combined statutory earnings rose 8.2 per cent during the year to $32bn, and return on equity was 1.25 percentage points higher at 12 per cent, the highest in five years.

However, both numbers shrunk in the second half, while the closely-watched banks’ expense to income ratio also rose during the half to 45 per cent.

Expenses grew 5.7 per cent year on year, even as all four majors trimmed and repurposed staff – particularly Westpac – in order to keep cost inflation contained.

ANZ chief executive Shayne Elliott. Picture: AAP

The jump in costs over the year was shielded by a 12 per cent rise in total interest income, courtesy of higher rates, the data shows.

But the banks are also facing the prospect of rising bad debts, as people struggle not only with a more expensive mortgage but also with higher prices for fuel, rent, electricity and services.

Credit losses and provisions have risen but both key metrics remain “well within expectations and some way short of a real spike”, PwC Australia banking and capital markets leader Sam Garland said.

“There is no guarantee this will continue of course and whether borrowers can continue to adjust to such a rapid increase in rates.”

ANZ chief executive Shayne Elliott on Monday said the bank was seeing customers remain resilient in the face of interest rates that had jumped 4.25 percentage points since May 2022.

He said only 2000 customers were in hardship but warned this could change.

“Our customers have so far proven resilient, with a relatively low level of delinquencies despite the current interest rate tightening cycle … That said, we know circumstances can change quickly.”

Westpac last week also said that only about 13,000 of its 13 million customers were in hardship.

The RBA lift in the cash rate from 4.1 per cent to 4.35 per cent last week will add $114 to the monthly interest bill on a $750,000 mortgage, according to RateCity.

That will bring the extra cost of servicing such a mortgage since the RBA began hiking in May last year to $1815 per month.

Commonwealth Bank, which has a different financial calendar from the other four majors, is scheduled to release its first quarter results for the 2024 calendar year tomorrow.

The market will be paying close attention to any sign the bank is ready to start offering lower interest rates or incentives to new customers, after recording three consecutive months of market share losses.

“I’d expect the intense competitive environment to continue, not only because of institutions seeking to grow market share, but also because the market overall just isn’t growing at the pace that it was previously,” Mr Nixon said.

“So they’ll be effectively having to compete to gain market share off competitors, rather than compete for new market participants (borrowers) entering the market.”

In announcing an 8.8 per cent jump in cash profit to $7.73bn last week – which included a 10 per cent fall in the second half – NAB chief executive Ross McEwan said the banks were having the “thinnest mortgage margins” he had seen in his multi-decade banking career.

NAB, like CBA, earlier this year withdrew its generous but costly cashback offers for new customers.