Australian banks, especially the Big Four, are expected to report weaker first-half profits due to high operating costs and intense competition in the mortgage and deposit markets. The increase in costs and the need to write new home loans have led to a reduction in net interest margin, putting downward pressure on profits. This situation is likely to result in a possible reversal of the recent stock rally, leaving the sector vulnerable to a correction.
National Australia Bank (NAB), the second-largest mortgage lender and biggest business lender, is anticipated to report a significant decline in its net interest margin for the first half of the fiscal year. Analysts predict that NAB’s cash position could drop by as much as 13% due to increased competition in the business lending market. The slowdown in the economy is expected to further disadvantage NAB compared to its peers, leading to a possible decrease in its premium valuation.
Market data aggregator Visible Alpha and other brokerages suggest that Westpac Banking and ANZ Group, the third- and fourth-largest banks in Australia, will also experience a decline in margins and underlying profits. Both banks are set to announce their half-year earnings in the coming days, with expectations of facing similar challenges in the current competitive market environment.
Commonwealth Bank of Australia, the largest lender in Australia, is expected to provide a trading update for the third quarter with a predicted margin decline of up to 11 basis points and a profit decrease of up to 10%. The overall sentiment in the banking sector has shifted due to unfavorable economic data, resulting in a reevaluation of rate cut expectations by central banks.
The recent rally in bank stocks was driven by optimism surrounding interest rate cuts and inflation control. However, as economic data continued to show weakness, the expectations for rate cuts have diminished, leading to a revaluation of stock valuations. Analysts at Citi warn that the current earnings outlook may not align with the multiples that banks are trading at, potentially exposing the sector to further volatility.
Australian banks are facing significant challenges in maintaining profitability amid margin erosion and intense competition. The upcoming earnings reports from key players in the sector are expected to shed light on the extent of these challenges and their impact on the overall market sentiment. Investors should closely monitor the developments in the banking sector to make informed decisions regarding their portfolios.