Margin recovery short-lived

  • By Elizabeth Fry
ANZ

The latest reporting season for the banks further confirmed a margin recovery with home loan repricing and deposits becoming a tailwind, according to Morgan Stanley analyst, Richard Wiles.

"This supports that view that bank earnings should be resilient in the short term," he said in a client note.

"Australian banks' margin recovery remains in the sweet spot into the first half of the 2018 financial year, with the sole exception of ANZ."

Wiles is forecasting 2 basis points of margin growth for the major banks in the 2018 first half - or 5 basis points ex the bank levy.

This follows a 2-basis point rise in the 2017 second half, or 4 basis points by stripping out the bank tax. 

Missing the sweet spot

“ANZ is the only bank missing the sweet spot with just 1 basis point of cumulative margin expansion from the first half of 2017 to the second half of 2018 on our estimates,” the analyst noted.

“This compares to margin increases of between 8 basis points to 10 basis points for the other banking majors.

“ANZ has less tailwinds in its mortgage and deposit franchises and more headwinds in institutional business.”

However, the analyst concluded that interest-only switching, front book discounting and greater deposit competition will lead to re-emerging margin pressure for all the banks in the 2018 second half.

Margins under pressure

Wiles is forecasting a 2-basis point margin squeeze for the big four banks at that time.

“We see margin pressure re-emerging in the second half as re-pricing comes to an end, more investor-only loan customers switch to principle and interest home loans in response to differentiated rates, and front book mortgage competition rises.”

ANZ last month posted an 18 per cent jump in annual cash profit to $6.94 billion on the back of lower costs and a big improvement in bad debts.

But all of the lender’s important margins narrowed.

Net interest margin fell 8 basis points to 1.98 per cent for the year.

In Australian retail and business banking, the margin eased 1 basis point half-on-half to 2.68 per cent despite the benefits of home loan re-pricing and lower deposit costs, while the Institutional margin ex markets fell a further 14 basis points on the half to 2.03 per cent.