Macquarie and Citi at odds over outlook for banking sector

Investment analysts at Macquarie and Citi both agree banks will unveil good numbers in the coming weeks, but have differing views around how 2023 will unfold for the sector.

Bendigo Bank is among the throng of banks set to report their performance in the coming weeks. Picture: NCA NewsWire / Nicki Connolly

Macquarie and Citi are at odds over the outlook for Australia’s banks, with the two sides publishing duelling takes on the year ahead.

With Commonwealth Bank, Westpac, NAB, Bank of Queensland and Bendigo and Adelaide Bank all set to report their earnings in the coming weeks, February is set to be a bumper month for bank data.

But Macquarie analysts in a note warned while Australia’s banks still had the scope for another earnings upgrade, “the outlook beyond that appears more challenging”.

Macquarie said banks are set to deliver the highest “set of pre-provision profit growth in over a decade” thanks to the roll-through from a series of hikes in to the cash rate.

The Reserve Bank of Australia has lifted the cash rate from its low of 0.1 per cent in April 2022 to 3.10 in December.

Many analysts expect the RBA will continue to lift rates.

Macquarie said bank earnings would be underpinned by a circa 17-27 basis point margin uplift.

On a longer view, Macquarie said banks would see a 34-55 basis points margin tailwind between the 2023 and 2025 financial years.

But the investment house warned earnings could be at risk in the second half of 2023 as higher inflation and rates result in lower asset prices, higher costs and the risk of impairments in the bank’s balance sheets.

“We expect banks to underperform the market throughout 2023 and kick this year off with an underweight call,” Macquarie analysts said.

“We do not believe banks provide a good inflation hedge and see a risk of negative jaws re-emerging from FY24.”

Macquarie said even if inflation peaked “earlier than expected” and the RBA cuts rates, banks would still underperform.

“The sector doesn’t provide a good hedge against inflation, particularly if asset prices are falling,” they wrote.

Macquarie said banks risked facing pressure from wages and third-party costs, with the Finance Sector Union pushing for pay rises in the region of 5 per cent.

“We see risk to consensus expectations, and while our FY24 cost forecasts are above market, we may still not be conservative enough,” they wrote.

“On the revenue side, once rate benefits flow through, volume growth will likely lag

inflation, given falling asset prices and reduced credit availability.”

On the back of the analysis Macquarie slashed CBA, Westpac, and Bank of Queensland to underperform.

But investment managers at Citi were more bullish on the sector, warning the banks may be set to repeat “two years of consecutive outperformance” that may see investors rewarded.

“We see a supportive outlook for the banks driven by a favourable macro; consensus earnings that need to be upgraded; and generally underweight positioning,” Citi analysts said.

“We forecast another constructive year for the sector in 2023, and meaningful opportunity within the banks.”

Citi said ANZ and Westpac were the “best ways to invest” as both listed banks were cheap and had “positive thematics”.

“ANZ is set to benefit from its strong weighting to institutional lending, where it will benefit not only from increasing demand for institutional credit from debt markets, but also institutional deposit spreads. (Westpac) is set to benefit primarily from its cost discipline as ‘Fix’ costs roll off, while also seeing a benefit from its institutional presence.”

CBA was handed a sell recommendation, while the analysts were neutral on NAB, with Citi warning the two banks were exposed to a tightening of demand in business and home lending.

“With much ritzier valuations, it feels difficult to sell a thematic warranting of outperformance,” Citi said.