(Bloomberg) -- Australian lenders will have to justify their equity valuations more than ever as they report earnings, now that central bankers are taking away their biggest tailwind.
Lower interest rates and increased competition are expected to darken the earnings outlooks of the nation’s biggest banks, potentially stalling this year’s stock rally. Analysts estimate that the lenders’ core profit measure, the spread between loans and deposits, will drop for at least the next year, starting with Westpac Banking Corp., National Australia Bank Ltd. and ANZ Group Holdings Ltd. as they report full-year results next week.
The results are “poised to ignite discussions about whether the financial sector has passed its prime in the current monetary cycle,” said Hebe Chen, an analyst at IG Markets Ltd. As high interest rates unwind, “all the players in the sector will face their true test,” which could spur mixed earnings.
The fresh numbers come amid a sustained increase in equity valuations. The nation’s banks are among the most expensive in the world, with the S&P/ASX 200 Finance Index trading at a higher forward price-to-earnings ratio than their global peers, according to data compiled by Bloomberg.
The situation sets up a question for bank bosses as to how to distinguish themselves: should they shoot for more growth, try to keep earnings high by cutting costs, or just appease investors with bigger dividends?
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So far, executives have given little indication of what their strategy for a new monetary environment might look like. Australia’s central bank has held its key rate at a 12-year high of 4.35% since last November and most economists don’t expect a cut before February.
Commonwealth Bank of Australia, the country’s largest lender, in August posted a slight decline in full-year cash profit as margins dipped.
While Australia’s banks have recorded few troubled loans, they’ve already begun cutting mortgage rates as competition squeezes the sector. Investment bank Macquarie Group Ltd.’s home-lending expansion will be keenly watched by investors when it reports half-year results on Friday.
Meanwhile, the lines of a new battlefront have been brewing in business lending in a further threat to the industry’s profit margins.
In spite of this, detractors of Australia’s big banks have had a tough time in 2024, said Hugh Dive, portfolio manager at Atlas Funds Management Pty, which owns shares in Westpac and ANZ.
Though “all the banks are priced very much to perfection” with “not a lot of room for error for any of them,” it has also been a losing proposition to be against them, Dive said.
While scandal-plagued ANZ’s stock has lagged Australian peers, it’s still up 20% this year, while Westpac shares have climbed about 40%. Both have trounced the Australian stock benchmark’s 7.8% advance.
“At the start of the year, a lot of fund managers were calling for a 0% weighting to the banks,” Dive said. “If you’ve done that, you’ve just been punched in the face all year.”
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