Lost in the headlines of the regional banking crisis in the US is the interim reporting period for ANZ Bank (ANZ), Macquarie Group (MQG), National Australia Bank (NAB) and Westpac Bank (WBC) today.
It has been widely accepted that the last six months or so have been a sweet spot for the banking sector, with improving net interest margins (NIM) as the cash rates have been raised over 300 basis points and a still-benign credit environment which has meant that bad debts have remained at cyclical lows. However, looking beneath the surface, it is pretty clear there are some headwinds the sector faces, contributing to recent weakness, and it’s not all fears of contagion from abroad.
Perhaps this is a big reason why the RBA shocked the market with a 25-basis point increase in the cash rate last week. Still, competition in the sector has been fierce, with significant discounting and one-off expenses such as money-back offers contributing to softer-than-expected NIMs. NIMs evidently peaked in late 2022, and despite rates continuing to head higher, we’ve seen a market share land grab rather than the ‘perfect environment’ so many analysts had been anticipating. And, now that we’ve seen the RBA increase rates and resume its hawkish policy stance, the next headwind may ultimately be a worsening bad debt environment as the banks start to increase provisions as more mortgages move into arrears. That will, to some extent, be delayed somewhat by the unprecedented cash buffers households built up throughout the pandemic. Still, there is a direct correlation between increases in the cash rate and affordability, so if rates continue to head higher, we will likely see property prices resume their downward trend.
For this reason, simply looking at the robust results presented by each of ANZ, MQG, NAB, and WBC is misleading and ignores the headwinds each is currently facing. The share prices are factoring in more challenging times ahead – remember that the stock market is always forward-looking – so they may prove excellent value at the present moment. However, note that despite their massive current profits, they are not without risk. However, at the very least, the potential catastrophe unfolding in the US is highly unlikely to spill over into Australia. Our big four banks are the most well-capitalised in the world, with sufficient liquidity to withstand significantly worsening economic conditions.