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The Australian big four faces slowdown challenges

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Following CBA’s earnings, Westpac, ANZ, and NAB will update their quarterly performances on 21 August, 17 August, and 15 August, respectively. The Australian big four have benefited from high interest rates in the first half of 2023, reporting strong earnings. However, However, a tougher macro environment squeezed profits with pressures likely to continue through the remainder of this year and into 2024. While all the big four are expected to have hit their profit peaks, the negative outlooks may have been priced in as these banks’ stocks have rebounded about 10% from their June lows. The earnings results could be a double-edged sword for their shares’ near-term price actions. Below are the first-half earnings reviews and the second-half forecast of Westpac, ANZ, and NAB.

2023 first-half review

Westpac Bank

Westpac beat earnings expectations in the 1H 2023, with the net profit rising 22% to $4 billion from a year ago, and a fully franked dividend per share up 15% to $0.7. Its return on equity came to 11.3%, up 2.5 basis points from 1H22, and the CET1 capital ratio was healthy at 12.3%, up 95 basis points from March 2022. The overall results beat market expectations due to a faster pace of raising borrowing costs than deposits. However, CEO Peter King said the bank was set for a slowdown in the second half due to lower credit growth as high interest rates started to bite consumer spending.  Westpac stepped back from the price war by sacrificing market share. Higher deposit rates may also narrow its net interest margin (NIM), which will be a focus of the second-half report. The bank’s NIM rose 5 basis points to 1.96% in the first half but stayed at a historically low level.

Australia and New Zealand Bank (ANZ)

ANZ bank had a record first half in 2023, with its cash profit up 23% to $3.8 billion, and the fully franked dividend of $0.81 per share, up from $0.09 a year ago. Its NIM was up 20% to $8.5 billion due to high-interest rates. However, the net interest margin was 1.75%, lower than an expected 1.85%. Its return on equity (ROE) jumped to 11.4% from 10.0% in 1H 2022. The same as CBA and Westpac, ANZ’s CEO Shayne Elliott warned that the second half would be more difficult due to intensified competition in retail banking as the economic challenges will start to impact households and businesses. ANZ made sharp pricing offers to borrowers, forcing other banks to follow, and grew its home loan book by 4% in the first half to $295 billion. Notably, ANZ’s business banking performed strongly, posting a record half-year result of 35% growth to $3 billion as the bank passed through high rates aggressively.

National Australia Bank (NAB)

NAB’s shares were the worst performer following the half-year result among the big four, with its shares sliding 6% on the reporting day. The bank’s NIM rose 14 basis points to 1.77%, short of an expected 1.83%, despite a strong profit of more than $4 billion, up 17% annually, but 2% below the market’s expectations. And the ROE was up 220 basis points to 13.7%. Its underlying earnings increased by 18.4%, and cash earnings rose by 12.3%. The dividend per share was $0.83, up from $0.73 in the first half of 2022. The challenges the bank faces are a narrower profit margin due to deposit and mortgage wars and a concerned outlook resulting from signs of growing customers impacted by financial distress.

Business growing focus

Home and business loans remain focused on gauging Australian banks’ growth trajectory. While most banks reported record profits amid rising interest rates, analysts believe that these major lenders may have hit profit peaks due to macro headwinds. Fierce competition among banks could lead to a slowdown in home loans and deposits, in turn pressuring the profit margin in the second half. The key metric gauging the Australian big four will be net interest margin (NIM), which measures the difference between the rates on profits and borrowing.  

Second-half 2023 forecast by Bloomberg

Westpac

Earnings per share: $2.09

Revenue: $21.7 billion

ROE: 10.39%

Net Income: $4.984 billion

ANZ

Earnings per share: $2.36

Revenue: $21.116 billion

ROE: 10.82%

NAB

Earnings per share: $1.16

Revenue: $10.34 billion

ROE: 12%

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