CHARTS: How Australian bank margins have been eroded

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Australian banks have been under pressure in the last month with investors unimpressed with the latest profit results and regulators restricting commercial housing loans.

Share prices have been hit hard following lacklustre half year earnings. The Commonwealth, recently touted as a stock which could soon hit $100 a share, has fallen more than 12% to around $84 since hitting a high of $96 on March 15.

Early last month the Commonwealth posted a flat March quarter cash profit of $2.2 billion with a rise in expenses and pressure on loan margins.

This followed Westpac recording a disappointing first half cash profit of $3.778 billion.

However, CLSA, in a note to clients, says it believes Australian banks will emerge in great shape.

The investment house points to the ability of the banks to pass on the cost of higher capital to borrowers and a massive opportunity to strip out costs in a low revenue growth environment.

“Having outperformed the broader market up until April 2015 the Australian major banks have been hammered as the macro factors which drove PE (price earning) valuations to previous highs reverse,” CLSA says.

However, CLSA says: “Even under a worst-case capital scenario, we believe Australian banks would emerge in great shape.”

CLSA says the increasing concentration of housing in Australian bank loan portfolios creates risk, as this chart shows:

And Australian bank net interest margins, the difference between the lending rate at and the cost of those funds, contracted between 1995 and 2007 because housing grew faster than business and lending grew more than deposits.

Just after the GFC, a reduced competitive environment allowed the banks to push up lending rates above the increased funding costs. Net interest margins expanded again.

But net interest margins are still lower, as this chart shows:

 CLSA notes that the Commonwealth, the NAB and Westpac all held back part cuts in the official cash rate this year. That helps those net interest rate margins.

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