The big four Australian banks will maintain their earnings growth for now.
But according to Citi analysts Craig Williams, Brendan Spoules and Andrew Tam, a number of headwinds will become apparent in the 2019 financial year.
Near-term, the analysts expect banks to benefit from the latest round of mortgage re-pricing.
That re-pricing has been driven by out-of-cycle rate increases on interest-only loans, as banks respond to regulatory measures to restrict investor lending.
The analysts said that for now, banks are in a “sweet spot” as they get the benefit from re-pricing on existing loans while overall mortgage volumes remain high.
However, further down the track they said that revenue growth among the major bank will continue its recent decline:
To back up their prediction, the analysts outlined the following four mortgage headwinds that are set to kick in:
1. Slow mortgage volumes: Citi expects mortgage growth to slow to 4% by around the start of the 2019 financial year, driven by the 30% cap on interest-only lending and higher interest rates.
2. Reduced benefit from re-pricing: The latest round of re-pricing for existing mortgages was driven by the most recent APRA restrictions, but Citi couldn’t identify any clear catalyst for further re-pricing down the track.
3. Customer loan-switches: In response to higher rates on interest-only loans, banks will face margin pressure as more customers switch into principal & interest repayments.
4. Discounts on standard variable rates (SVR): Price competition is increasing for new loans. The SVR discount on a $500,000+ mortgage is now 50-60 basis points higher than it was in 2015.
Taken in aggregate, Citi said that the above headwinds will form a “boxed quartet” which will continue to put the clamps on revenue growth.
The analysts also cited margin pressures outside of the residential mortgage market, with more competition in new business lending.
“Business banking (excluding property) is experiencing a breakout in front-book discounting as banks search for a market without regulatory restrictions,” they said.
While Citi’s team focused most of their analysis on revenue, they also took aim at highest staffing costs on the expense side.
This chart shows how the big bank have managed to reverse staff expenses costs, after a sharp rise since 2013:
However, Citi suggested there’s room for further reductions.
“Higher technology costs, compliance and regulatory costs mean staff costs represent the best (and largest) opportunity to slow overall group expense growth,” they said.
While the analysts said that Commonwealth Bank and Westpac are best-placed to benefit from near-term mortgage re-pricing given their larger residential loan books, they are lukewarm on the sector as a whole.
ANZ is the only major bank that Citi has a buy-rating on. The analysts are neutral on NAB and Westpac and hit the beleaguered Commonwealth Bank with a sell-rating.