Bank profit margin crunch to continue as customers shift deposits

Morningstar senior equity analyst Nathan Zaia said the big four banks were generating decent returns, but that credit growth remained in the low single digits and that their margins remained squeezed. “The next set of results will still see margins coming down for the major banks,” he said.


Zaia said the pressure on margins came from both robust competition in both mortgages and deposits.

“Mortgage competition will still be a factor,” he said, looking ahead to the next set of bank results. “And I think we’re still going to see a bit more switching on the deposit side out of transaction accounts and into higher-interest customer deposits.”

In February, Australian household deposits grew by $6.2 billion to a record high of $1.46 trillion. Since the beginning of the interest rate hiking cycle by the Reserve Bank of Australia, household deposits have risen by more than 15 per cent according to RateCity.

Household deposits are a major source of funding for the banks, but are more expensive relative to some other types of funding, including the Term Funding Facility (TFF) which offered low-cost funding to banks in response to pandemic, and is expected to be paid off by July.

While mortgage competition has remained relatively intense, Zaia said at some point, it would probably soften, especially as smaller, regional banks such as Bendigo and Adelaide Bank and Bank of Queensland have struggled to grow their home loan books in line with the market.

Late repayments – an indicator of borrower stress – remain lower than pre-COVID levels.Credit: Peter Rae

“I don’t think home loan competition has gotten any worse,” he said. “But I think at some point we’ll see the level of competitiveness on mortgages ease.”

Zaia said smaller banks more broadly were having a tougher time compared to the major banks.

“Their returns on equity have always been lower,” he said. “But in this period where margins have been squeezed, they’re below what we think is reasonable for shareholders.”

Zaia said late repayments – an indicator of borrower stress – remained lower than pre-COVID levels as a result of cash buffers saved up by households during the pandemic, low unemployment and strong house prices, but that arrears were ticking up.

“I would expect arrears to normalise at some point,” he said. “People are cutting back spending to be able to repay their loans, but it’s not sustainable forever.”

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