Written by: Robert and Russell Markham

If you have been graphing any of the top 5 banks in Australia recently (ANZ.AX, CBA.AX, NAB.AX, MQG.AX and WBC.AX), you will have noticed the earnings have either held steady or been rising! This should come as no surprise as we wrote an Essay about this back on the 11th of June 2021 entitled, “The Banks Are Coming Back!” In the Essay, we noted the earnings of the top 4 banks were turning around (along with MQG.AX). Since that time, earnings have powered on. Let’s explore a bit further as to what is driving the earnings.

To illustrate one of the key reasons, let me ask you this, have you noticed, as interest rates rise, banks will pass on the mortgage costs quickly? What about the term deposit rates? Hugh Dive, Chief Investment Officer from Atlas Funds, sums it up well: “Every other time we’ve gone through a rising rate environment, banks are very slow to move term deposits, but very fast to move mortgage rates up.”

The lag in term deposits versus mortgage rates is a massive windfall for banks. They get the immediate uplift in mortgage payments, while holding back on the term deposit payments. This is only one such way that the banks have benefited to grow their earnings. Falling and rising interest rates holds another important piece to those rising earnings!

Falling interest rates in recent years have squeezed banks’ lending margins. Banks have not been able to build in much margin since the low interest rates provided very little room to move. It is much easier to build in a bit of margin on a larger interest rate. Furthermore, when interest rates fall, banks can struggle to cut back on locked in deposit rates relative to the falling mortgage rates (even if the banks are a bit slow at passing on the savings). When the official cash rate was at a record 0.1%, it was difficult to offer rates much higher than 2-3% (since outcry from customers noting the 0.1% cash rate). However, at higher rates, banks are more likely to get away with higher margin as the public is primed into accepting the rising rates now and are eager to lock in for fear of further rises!

While the official cash rate has been at an all-time low, the banks have been using their time wisely to secure sizable lending at ultra-low rates. Why? With rising rates on the cards, the big banks will be able to draw upon their borrowings at the ultra-low interest rates and pass these on at much higher rates. The banks no doubt will be getting ready to boost profit margins as rates increase. A rate rise is preferable to the banks, but not to you, the borrower.

For smaller lending organisations to benefit, they have typically focused on a segment of the market that is higher risk. As such, as interest rates kick in, the higher risk of the market is more at risk of defaulting. This, in turn, hurts the smaller lenders and plays into the hand of the big banks – yet again.

If you click on the Graphs Tab in VectorVest and graph ANZ.AX, CBA.AX, NAB.AX and WBC.AX – look at the 5-year graph for Earnings (EPS). To do so, select the VectorVest Simple Layout (per Graph Layouts on the right of your screen once you have graphed the first stock). Notice how EPS has powered on from April/May 2021 to present.

Since 11 June 2021 when we noted that the earnings on the banks are starting to turn around through 12 April 2022, MQG.AX is up 34%, NAB.AX is up 24% and CBA.AX is up 5%. WBC.AX is down 8% and ANZ.AX is down 3%. It is of no surprise that MQG.AX, NAB.AX and CBA.AX continue to see their EPS scores power higher. However, ANZ.AX and WBC.AX have had their EPS scores level of…keep an eye out for when they start ticking up again with interest rates rising!


If you have further questions about the information provided in the webcast, please give us a call. Our VectorVest Consultants are ready to help you.

VectorVest Inc (ARBN 654 498 218) and Russell Markham are  Authorised Representatives (No. 1294036 and No 1294037) of Centra Wealth Pty Ltd (ABN 39 158 802 450) which holds an Australian Financial Services License (AFSL No. 422704).

Please refer to our Financial Services Guide at which provides you with information about us and services we can provide. Any advice is general advice only and does not consider your personal objectives, financial situations or needs. You should consider whether the advice is suitable for you and your personal circumstances.

Any advice is general advice only and does not consider your personal objectives, financial situations or needs. You should consider whether the advice is suitable for you and your personal circumstances.

Past performance is not a guarantee of future results.  Forecasts and BackTests used or discussed in this presentation are intended as a guide only and actual results may be affected by known or unknown risk and uncertainties and therefore may differ materially from results ultimately achieved.