The outlook for big bank revenue growth that emerged from the recent half-year financial reports of ANZ, NAB and Westpac is “not as bad as feared”, according to a Macquarie Securities report. But they will have to work harder on their costs
The problem the big banks face is that more than half of their earnings come from home lending, which has been hit by a falling housing market and regulatory pressure to cut back on high-risk lending.
Banks have been the beneficiaries of higher Australian household leverage – a trend which appears to be coming to an end.
And changes already being implemented as a result of the Financial Services Royal Commission, such as more rigorous income and expenses checks on loan applicants, could slow growth in home lending further.
The big banks all reported weaker net interest income performance in their latest half-year financial reports. Commonwealth Bank’s net interest income grew 2.8 per cent in the half, ANZ’s 1.1 per cent, NAB’s was flat and Westpac’s fell 0.1 per cent.
In a review of the sector issued last week, Macquarie says: “We recognise that the revenue outlook remains challenging for the sector and our 2 to 3 per cent housing credit growth forecast incorporates this view.”
However, it says overall balance sheet growth could be higher than that if business credit conditions continue to improve and if the banks can offset margin pressure from increased lending competition by better managing their deposit pricing.
But it warns that banks will take more radical steps to reduce costs if shareholders are going to be adequately rewarded for holding their stocks.
“Our analysis highlights that Australian banks appear to have about 40 per cent more branches relative to urban density vis a vis global counterparts.”
Banks could make very significant cost reductions, in the order of 15 per cent of operating expenses, if they brought their branch numbers into line with international averages. ANZ has 719 branches, Commonwealth Bank 1173 branches, NAB 1003 and Westpac 1301.
“While we recognise that the current political landscape is not conducive for an aggressive approach on expenses, we believe the banks should be able to target flat to declining costs for the foreseeable future.
“Should banks deliver around 3 per cent revenue growth and maintain their costs broadly at current levels, they should deliver mid-single digit underlying earnings growth. Coupled with around 6 per cent dividend yields and scope for capital return, this provides an attractive long-term investment thesis.”
Macquarie’s current recommendations are ‘outperform’ for ANZ, ‘neutral’ for CBA, ‘outperform’ for NAB, ‘outperform for Westpac, ‘neutral’ for Bendigo and Adelaide Bank and ‘neutral’ for Bank of Queensland.
It says ANZ delivered the best half-year result among its peers, with “leading cost performance”.
Good news for all the banks was that bad and doubtful debt expenses remained at low levels. Compared with the financial crisis, when the ratio of impairment charges to total loans was up above 160 basis points, the current level is between 30 and 50 bps.