Investors have said that a run of strong outperformance in the stock market and earnings at the ‘big four’ banking giants in Australia will fade later in 2023.
This is in light of the fact that funding costs are rising and a cooling economy means more bad debt and slower credit growth.
The banks
Westpac Banking Corp, National Australia Bank Ltd., ANZ Group Holdings Ltd., and Commonwealth Bank of Australia are all on course to record massive profits in their ongoing financial year.
Margins have reflated thanks to rising interest rates and the economy is booming, which means good news for the banks.
CBA is the biggest of the four in terms of market capitalization and its net income is forecast to grow by 4% in the first half of the year.
The rest of the banks are also expected to record growth in the mid-teens, or higher. That performance was reflected in financial shares last year that outperformed the broader share market.
However, investors have said that the performance of banks will hit its peak soon because unemployment is on the rise as are costs, which means more bad debt and fewer new loans.
Market analysts said that the upcoming results of the banks will be as good as they get for some time.
The forecasts
There is a 1.3% slump forecast in the net income for CBA in the financial year 2024, which is a far cry from the 6.2% rise forecast for the current financial year.
The remaining three banks will decline further and ANZ is actually expected to go negative. The Australian economy is expected to slow down halfway through this year.
Australian home mortgages worth A$350 billion have been moved from fixed interest rates to variable ones.
The central bank believes that mortgage payments will rise by nearly 40% for at least two-thirds of people who have borrowed on fixed interest rates.
Economists have said that credit growth will halve this year due to higher interest rates, a weaker economy as well as rising inflation.
Other details
There is already an issue with the housing market, as prices have dropped about 9% since April, which makes it the fastest decline since record-keeping started in 1980.
3/4th of the mortgage market is under the control of the ‘big four’ banks and it saw a 29% decline in the value of new loans in the previous year.
Funding is also becoming expensive. In the next 17 months, the banks have to repay the central bank loans of A$188 million that had been made during the COVID-19 pandemic.
While a slowdown is expected in the second half of the year and bank earnings are expected to take a hit, some investors don’t believe the worst will happen.
They have said that whatever downturn does happen will be a mild one and even if there is a slowdown in margin growth, the higher interest rates will help in balancing things out for months.
On Tuesday, the Reserve Bank of Australia (RBA) hiked its interest rate by 25 basis points and flagged further hikes.
