Australia's largest lenders are predicted to see record earnings in 2023
The big four banks are predicted to see record combined profits of more than $33 billion this financial year even as investors weigh the risk of rising bad debts as the economy struggles.
Last year, the big four raked in their highest combined profits since 2018 as higher interest rates boosted their margins in the second half, according to The Sydney Morning Herald.
Market-watchers expect that trend to continue this year, pushing earnings even higher.
The prediction comes as markets have started the year off strong, with analysts pointing to signs that the Australian and global economy could be taking high interest rates in stride better than expected, the Herald reported.
The consensus forecast is for the big four banks’ combined cash earnings to reach $33.5 billion in the 2023 financial year, according to recent research from UBS. That’s up from $28.5 billion last year. The current record for the big four’s annual earnings is from 2017, when the banks’ combined profits surpassed $31 billion.
Widening margins
The key driver for this year’s predicted profits is higher net interest income, the Herald reported. Net interest margins – the difference between funding costs and rates on loans – have widened significantly thanks to the Reserve Bank’s eight consecutive rate hikes last year.
Banks have passed on the hikes to mortgage customers in full, but have been slower to raise deposit rates, the Herald reported. That tactic has widened margins, but also drawn scrutiny from the Australian Competition and Consumer Commission.
Analysts have warned, however, that there are a variety of forces affecting banks’ performances. Some market-watchers worry that higher interest rates will drive up loan losses.
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Morningstar analyst Nathan Zaia told the Herald that he was more optimistic, believing bad debt would ultimately return to long-term averages rather than spiking. Zaia predicted that the main driver for bank profits in 2023 would be wider net interest margins.
“The obvious risks are what happens with loan losses, but I think the margin expansion story should outweigh that,” he said.
Bad debt fears
Morgan Stanley analyst Richard Wiles said in a note that he felt the outlook for margins was good in the near term, but worried that debt fears could impact bank share prices later in 2023.
“For now, margin expansion and resilient credit quality underpin the earnings outlook,” Wiles said. “However, the size and speed of the tightening cycle creates the prospect that weaker volume growth, declining margins, higher costs, and rising loan losses weigh on the banks’ share price performance in the second half of 2023.”
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