AUSTRALIAN BANKS UNDER PRESSURE

The Australian mortgage market is worth over 2 trillion AUD. Before early 2022, in a low interest rate environment, banks would probably have got away with not passing on any rate cuts in full to their customers.

But in the current environment after a series of aggressive rate hikes, and with cost-of-living pressures taking their toll, bank customers are very rate sensitive and have become more discerning, expecting banks to pass on any possible rate cuts in full. Customers are making it clear that they will not hesitate to move their business to a competitor bank if their expectations are not met.

Analysts at Macquarie Bank have forecasted that banks could see their profits slide by between 15 and 20 percent should their loan books need to be adjusted for more competitive rates to meet those offered by other banks. Time will tell how this plays out. But for now, bank profits are under potential threat from losing mortgage customers and squeezed margins.

To understand the possible impact of margin squeeze, we have used VectorVest to create a WatchList of the Big 4 banks ANZ.AX, CBA.AX, WBC.AX and NAB.AX. If you need a refresher on building a WatchList, please refer to the Training tab and then click on the Software How-To Videos link and refer to Session 5: WatchLists.  Once you have built the WatchList, graph the WatchList Average by right clicking on the WatchList Average line at the bottom of the WatchList, and then select View WatchList Average Graph. Add Earnings Per Share (EPS) as noted per the blue line below, Relative Timing (RT) as noted by the red line below and Net Profit Margin (NPM) as noted by the green line below to the graph. You will find EPS and RT per the Capital Appreciation selection by clicking on Add Parameter in the graph control Panel on the right.  NPM can be found in the VectorVest Fields selection.

Note how the EPS outlook and NPM fell over the period, but price and RT rose until March when they started to fall away as well.

Falling RT, along with a falling EPS and NPM, tells us that the situation for banks is weakening as they enter into a much more competitive environment for customer retention and margin management.

As we always emphasise, we do not predict stock prices, but we do have our VectorVest tools to track price and earnings trends to enable us to see how the mortgage market plays out for the banks in the weeks and months ahead.

 

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