Bank revenue to get big boost from deposits: Citi
But Mr Sproules said that, as all banks have similar deposit compositions, cash flows from higher deposit interest income will close the gap between National Australia Bank and Commonwealth Bank “by asset growth” and ANZ and Westpac “in revenue trouble”.
All banks currently have a historically high volume of fixed-rate mortgages, which Sproules said was a direct result of the Reserve Bank‘s term funding facility and helped to dampen interest margins sharp.
“The strong mortgage competition over the last three years can be directly attributed to the introduction of the TFF [term funding facility] by the RBA during COVID-19,” he said.
“In the end, the TFF was not necessary and the banks sought [for] and found duration-matched assets to invest the newly found liabilities. This created the biggest fixed-rate mortgage boom in living memory, with falling client rates reflecting the cheap cost of TFF as well as the strong competitive momentum created by “giving everyone financing”.
In their quarterly and interim results in February, all banks reported a slowdown in their net interest margins (NIMs) as the TFF, the three-year funding that ended last year, unfolds in course of the next few years. But Mr Sproules said a rise in the cash rate and the resulting return to floating rates now that the TFF has expired will be good news for banks.
Major banks have suffered a significant contraction in the NIM due to the impact of lower fixed rate mortgage spreads over the past six months in particular, with tighter pricing and more redemption offers.
“While rising rates may prove to be a shock to a number of Australian households, the impact on revenues and profitability of big banks is a very different example,” Mr Sproules said.
Since most borrowers are expected to revert to variable rates, a normal level of spread is likely to be achieved.
“So that should see the end of the fixed rate terms of these loans generating some asset allocation expansion for the big banks,” he said.
Westpac is the first major bank to report in May, with its interim result expected on May 9. Bell Potter analyst TS Lim said Westpac’s first-half cash profit would be $3.11 billion lower than the $3.54 billion in the first half of 2021.
“The negative trend should then reverse and the first half 2022 figure appears to be in line with the first quarter cash profit of $1.58 billion,” Lim said.
Mr. Lim predicts that Westpac’s net interest margin will continue to decline another 5 basis points to 1.86%, “due to higher liquidity, pressure on mortgages – home loans consumer and business – and the growth of low-margin fixed-rate mortgages”.
But Lim noted Westpac’s deposit growth was strong in the first quarter, including $12 billion in additional wholesale funding.
“On the other hand, the bank continues to benefit from cheaper funding rates, especially for deposits,” he said.