The Reserve Bank has again warned investors to watch for further falls in earnings for banks.
Westpac (November 4), the ANZ (October 31), NAB (November 7) and Macquarie are due to report their results (Macquarie’s will be an interim on November 1) late this month or in early November (Bank of Queensland is due to report its results next week on October 17).
Analyst reports are starting to emerge and Bell yesterday estimated the ANZ will reveal an unchanged final dividend of 80 cents a share and a statutory result of $6.6 billion.
In its second and final stability review for 2019, it says a combination of factors will depress bank earnings, starting with the continuing rise in customer remediation over abuses exposed by the Hayne Royal Commission.
The NAB last week added $1.18 billion to the ever-mounting toll cost – now estimated at more than $10 billion – for the entire financial sector.
“The recent decline in profits was primarily driven by customer remediation costs arising from misconduct – mostly within banks’ wealth management and financial planning businesses,” the RBA said in the review.
“However, underlying profits have also declined. Non-interest income has fallen as banks have sold or scaled back fee-generating activities. Interest income growth has been limited amid slowing housing credit and a persistent narrowing in the net interest margin (NIM).
“The NIM has been declining because of pricing competition for housing loans and switching from (higher-margin) interest-only to (lower margin) P&I lending, although this has been somewhat offset by last year’s repricing of standard variable home loan rates and the easing in short-term wholesale funding costs this year.
“Remediation charges for incorrect (earlier) interest charges have also temporarily lowered NIMs by a few basis points over the past year.
“Analysts expect little growth in banks’ profits, given forecasts for ongoing weak credit growth, ongoing pressure on NIMs and further costs relating to customer remediation and the need to improve compliance and risks management.
“Bad and doubtful debt charges are also expected to increase, in part because of the rise in housing loan arrears but more broadly because they are at cyclical lows.
“The uncertain outlook for profitability has increased Australian banks’ implied cost of capital relative to other shares over the past three years, as measured by the spread of forward earnings yields to the risk-free rate.
“The premium on banks’ implied cost of capital is currently about as high as it has been for many decades.
“The gap between the premium applied to banks and other shares has narrowed somewhat this year, mainly due to an increase in mining companies’ forward earnings yields, but it remains well above its historical average,“ the RBA concluded.
