Citi is forecasting full-year earnings growth of 51 percent growth for the banks this year but has warned of a slowdown in coming years.
The current reporting season showed that the banks have benefitted from an exceptionally benign asset quality environment in 2021, Citi analysts said in a client note.
Actual losses were immaterial, coupled with collective provision write-backs as bad debts expected at the height of the pandemic failed to materialise.
However, the analysts highlighted the softness of core earnings prospects for the big banks.
“The excess liquidity that is providing for benign asset quality is also driving low volatility, which drove a 30 to 40 percent decline in Markets & Treasury revenues through the June quarter.”
Consequently, the broker is predicting a drop of roughly four to five percent in earnings expectations for the coming years because of volume growth confined to mortgages, net interest rate compression, and higher-than-expected costs.
Citi’s banking analysts had previously flagged that the focus this reporting period would be on capital returns and the banks certainly delivered. The Commonwealth Bank announced a $6 billion off-market buyback when the market expected $5 billion adding to National Australia Bank’s $2.5 billion and ANZ’s $1.5 billion on-market buybacks announced before reporting season.
Westpac said it will update the market on capital management in November.
Drop in net interest margins
For their part, Morgan Stanley analysts highlighted the fall in net interest margin that resumed in the June quarter. “We believe mortgage-related headwinds are ongoing, but the strong tailwinds from lower funding costs and a change in deposit mix are starting to fade,” they said.
NAB noted that its margin was "broadly stable" in the June quarter, but CBA's commentary suggests that the fourth quarter margin was lower than for the third quarter.
Bendigo Bank’s margin fell four basis points on the prior quarter.
The broker is forecasting a second half margin decline of two basis points for both ANZ and NAB and six basis points for Westpac.
Looking ahead, Morgan Stanley is expecting a margin decline of around three basis points in 2022.
“On balance, we see some downside risk to these estimates, given mortgage-related headwinds are likely to be ongoing, but the strong tailwinds from lower funding costs and a change in deposit mix should fade.”