NAB’s personal banking group executive Rachel Slade said the decision “reflects the national and global environment, including changes in official cash rates,” while the head of retail banking at ANZ Maile Carnegie said more than two-thirds of the bank’s customers advanced in payments, having built up the bearings by not cutting their payments as rates fell.
“Many of our customers are in good financial condition to manage rate increases with a 70% advance on repayments. A large number of them have accumulated amortizations after not changing their repayments when rates have been reduced for several years, “Carnegie said.
Wiles said the Reserve Bank is going to raise the cash rate by 50 basis points on Tuesday “seems to be at the start of a” fast and aggressive “hardening cycle that increases the final risks for major banks.
“We believe that a ‘fast and aggressive’ cycle creates more challenges for banks than a ‘gradual and measured’ hardening cycle,” Wiles said.
With regard to RBA-type hardening cycles since 1994, Mr. Wiles said there was an average price reduction in bank earnings multiples of about 1.5 times in the three months following the first rise and 2.5 times between the first and last rise. But he said banks are starting this cycle with intoxicating ratings around 15.6 times, up from 8.2 times in 1994.
Wiles said the CBA was the most exposed of the four given its current price at a multiple of gains of more than 18.5 times and its 48 percent premium to other major banks.
“We believe she is the most vulnerable of the majors to a downgrade,” Wiles said.
UBS analyst John Storey agreed that ratings were too high for the cycle stage and would be reduced over the next few weeks.
“The PEs that the banks are really dealing with should go down a little bit; the banks need to grow there,” Storey said.
However, he noted that all the management teams of the big banks had emphasized the potential for a soft landing at the AFR banking summit last week.
“I think it’s very believable to get to the soft landing stage,” Storey said.
“The message we have tried to convey to customers is that we have reasonable confidence in our earnings figures and the rate hike is good for banks from an revenue perspective.”
Prior to the RBA’s decision to raise rates in May, all of the bank’s top executives had expected slow, steady moves to help ease the pain of customers, as many found their first rate hikes interest in more than a decade.
Wiles said Morgan Stanley’s current forecasts suggest that major banks’ margins will widen by about 10 basis points between the current half and the second half of 2024, but mortgage growth would slow to around 3 % next year and charges for impairment would reach 19 basis points. loan points for 2024.
Storey said banks’ bad debts tend to be more highly correlated with GDP than the cash rate. He was also optimistic that banks already have large amounts of provisions that will protect them from large loss of profits.
“This time it is different to enter this cycle. The biggest point of difference is the huge amount of collective provisions collected at the beginning of the pandemic and not all have used it, there is still a collective provision about $ 1.9 billion, “Storey said.
“That’s one of the reasons why if the quality of assets starts to deteriorate, you have a lot of room for banks to use, which will protect their revenue.”
JP Morgan adjusted its cash rate forecasts, now tilting another 50 basis points increase in July and a “terminal” rate of 2.35 percent, 10 basis points more than the previous forecast, for the second quarter of 2023.
JP Morgan banking analyst Andrew Triggs said the move would have a minimal impact on banks’ net interest margins, adding that he did not expect a substantial increase in short-term impairment charges either.
“Our NIM forecasts for banks are based on a terminal rate of 2.25 per cent, so today’s change does not appear to have significant implications for our NIM forecasts or loan losses (the latter it means a return to a more normal level of deterioration during the financial year). 2024, but no overcoming), “said Triggs.
Triggs said the negative sentiment will weigh on the sector during the period before credit deterioration returns to normal levels in 2024.
“In past cycles, banks have underperformed in periods of falling house prices. Banks report significant loan repayments for housing, including mortgage prepayments and account balances offset, but there is a large cohort of borrowers who have never seen interest rate hikes before, “he said.
Citigroup economist Josh Williamson said the housing market would not be significantly affected by rising rates, and household balances remain strong.
“The housing market is supposed to be able to cope with rising interest rates. While the RBA acknowledges the nascent fall in some house prices, they, like us, have seen the very strong after the pandemic, which supports wealth and household spending, ”Williamson said.
“Today’s addition of 50 basis points to the cash rate would not have been made if the Reserve Bank’s board had expected it to have a material influence on the housing market. In fact, our view is that household balance sheets are strong and are unlikely to create a risk of financial stability due to higher rates. “