Interest rate surge to boost big bank profits past $16b

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Australia’s major banks are expected to report sharply higher first-half profits, with analysts forecasting the big four made more than $16 billion in combined earnings in six months.

While United States regulators are working to head off further instability in the US regional banking sector by forcing a sale of First Republic Bank, local giants National Australia Bank, ANZ Bank and Macquarie Group are forecast to reveal strong profits this week.

Half-year results from the banks are expected to reveal sharply higher profits.Credit:

With Westpac’s results due next week, followed by a Commonwealth Bank trading update, the bank profit season is likely to be dominated by the impacts of the rapid-fire increases in interest rates during the last year.

A key focus for investors will be how the 3.5 percentage point rises in official rates are affecting bank’s profit margins, which surged last year, while there will also be a focus on any signs of rising borrower stress.

The Reserve Bank is expected to keep rates unchanged this Tuesday, but its cash rate rises in the past year have helped deliver a windfall to banks because lenders have generally increased lending rates by more than deposit rates.

According to analyst estimates, the profits of NAB, ANZ and Westpac are all expected to increase by well above 10 per cent, mainly because of a sharp widening in net interest margins (NIMs), which compare funding costs with banks’ pricing of loans.

But despite the surging profits, which are likely to fuel bigger dividends, some in the market believe banks will face a tougher slog in the second half, as Australian rates get close to peaking.

Portfolio manager at Opal Capital, Omkar Joshi, said interest rate rises were no longer boosting bank margins like they did last year, due in part to growing competition for deposits and loans. Joshi said investors were also eyeing the risk of rising bad debts, which are expected as more borrowers feel the hit from rising interest rates

“Earnings are still going up, but margins are coming under pressure and I think the bigger concern is the outlook from here,” Joshi said.

Credit Suisse analyst Jarrod Martin said margins and credit quality would be the key issues for investors, though he did not expect a significant rise in bad debts yet. “I think we need to wait probably another three months or so before we really start to see the impact from the rapid increases in rates,” he said.

Consensus estimates cited by Citi have NAB delivering $4.16 billion in cash earnings on Thursday; ANZ reporting $3.8 billion in earnings on Friday; and Westpac reporting $3.8 billion in net profit on Monday next week.

Commonwealth Bank, which operates on a different financial year to rivals, made record half-year earnings of $5.15 billion in February and will provide a quarterly trading update next week. Macquarie is expected to report about $5 billion in full-year profits on Friday.

UBS analyst John Storey titled his note on the upcoming results The Last Hurrah, saying bank results this earnings season were likely to be “close to peak profit”. He also highlighted sources of pressure including the stiff competition in mortgages and potential for higher bad debt charges.

Citi analyst Brendan Sproules said he thought the results would show better-than-expected asset quality, and he thought net interest margins would not fall as sharply in the coming period as many expect.

“We think that while NIMs have peaked, they will likely defy downward expectations and plateau in coming halves. Coupled with asset quality that takes longer to deteriorate, it points to more resilient earnings in coming periods, and we think that will be the key focus this reporting season,” Sproules.

The Australian bank results follow strong recent results from some large US banks, defying the market fears sparked by Silicon Valley Bank’s failure in March.

However, instability in the US regional banks re-surfaced at the weekend, with regulators reportedly seeking bids for stricken San Francisco-based First Republic Bank, following a plunge in investor confidence and an exodus of deposits.

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