(Bloomberg) -- It’s going to be a “tough” earnings season for Australia’s biggest banks, according to Goldman Sachs Group Inc.
Full-year results due from three of the lenders -- starting with National Australia Bank Ltd. on Thursday -- are poised to show that a record-breaking run of profits is coming to an end amid higher funding costs, lower interest margins and rising bad-debt charges.
Australia & New Zealand Banking Group Ltd. may report its lowest cash profit in four years, while Westpac
Banking Corp.’s may be little changed, analyst surveys by Bloomberg indicate. The lenders all reported weaker-than-expected cash profit in the first half, the first time in at least a decade that three of the nation’s largest lenders missed estimates at the same time, according to data compiled by Bloomberg.
“Its likely to be a tough half,” Goldman Sachs analysts Andrew Lyons and Ashley Dalziell wrote in an Oct. 14 note to clients. “We expect margin contraction to feature.”
The analysts, along with those at Citigroup Inc. and Deutsche Bank AG, are among those who trimmed their expectations this month for the three banks’ results, which are due over the next two weeks.
The following are the average full-year cash profit forecasts for each bank, according to a Bloomberg poll of 14 analysts:
: A$6.25b, down from A$7.22b in fiscal 2015 Westpac
: A$7.83b, little changed from A$7.82b NAB: A$6.51b, up from A$5.84b; boosted by sale of life-insurance business
Commonwealth Bank of Australia, the nation’s largest lender, has a June fiscal year, rather than the September-end of its competitors. It’s due to give a first-quarter trading update on Nov. 8.
The banks’ net interest margins, a key measure of lending profitability, are already at an eight-year low and analysts expect these to remain under pressure amid a rise in wholesale funding costs and intense political pressure on lenders to pass on record-low interest rates to mortgage holders. The median margin of the four banks is 2 percent, compared to 3.1 percent for large U.S. banks, data compiled by Bloomberg show.
Swaps markets are currently pricing in almost no chance of a rate hike in Australia over the next 12 months, meaning that lending spreads are set to remain under pressure. Meanwhile, the banks’ overseas funding costs have risen as investors demand higher yields to hold their debt amid concern over their exposure to the slowdown in mining and any possible decline in Australian real estate.
Mortgages account for about two-thirds of the big four banks’ loan books, on average. The nation’s fixed-income investors now cite property-market exposure as the greatest risk to bank credit quality over the next year, Fitch Ratings said in an October survey.
That augurs poorly for bad-loan charges. Having stayed low for years, those costs have started to drag on earnings as the end of the mining boom and New Zealand’s milk crisis pressures loan repayments from the resources and dairy industries. In the first half of the year, collective impairment charges for the four big banks hit A$2.5 billion, the highest level since the first half of 2010.
Given the pressures faced by the banks, one focus this earnings season will be whether they can maintain high dividend-payout ratios without compromising the capital reserves demanded by regulators. ANZ
cut its payout to shareholders in May for the first time since 2009.
NAB and Westpac
currently have payout ratios of at least 80 percent. The six biggest lenders in Canada, which has the most profitable banks in the developed world, have an average payout ratio of 43 percent, data compiled by Bloomberg show. Citigroup analyst Craig Williams reckons the two Australian banks will reduce dividends when they report their results, according to an Oct. 14 note. Goldman Sachs is also expecting NAB to cut.
Lower dividends “would be a pragmatic step given payout ratios are now at unsustainably high levels,” said Omkar Joshi, a Sydney-based analyst at Watermark Funds Management.