Australian Bank Performance Is “As Outstanding as It Gets” When the Economy Starts to Slow Down

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Investors predict that a streak of impressive earnings and stock market gains at Australia’s “big four” banking powerhouses will cease later in 2023 as funding costs rise and a slowing economy foretells slower credit growth and more bad debt.

As the economy expands and rising interest rates reflate margins, the Commonwealth Bank of Australia (CBA) CBA.AX, ANZ Group Holdings Ltd. ANZ.AX, National Australia Bank Ltd. (NAB) NAB.AX and Westpac Banking Corp. WBC.AX are on course to earn significant profits in their current fiscal years.

“The biggest of the four by market capitalisation, CBA, is forecast to grow net income 4% in its first half, Refinitiv data showed. The rest are set for mid-teens growth or higher. Reflecting that performance, financial shares outperformed the broader stock index last year, down 2.7% versus a 5.5% decline,” Reuters first reported.

However, investors predicted that bank performance would soon peak as costs rose and unemployment increased, resulting in fewer new loans and more bad debt.

Tribeca Alpha Plus Fund manager Jun Bei Liu said, “The upcoming results (season) will be as good as it gets.”

From a predicted 6.2% for the current fiscal year, CBA’s net income is expected to decline to 1.3% in 2024. The other three will contract even further and turn negative in the case of ANZ.

From mid-2023, it is anticipated that the economy will weaken as about A$350 billion in home mortgages switch from fixed to variable interest rates. According to the central bank, mortgage payments will increase by at least 40% for two-thirds of fixed-rate borrowers.

According to ANZ experts, credit growth should be cut in half by 2023 due to a weaker economy, rising rates, and accelerating inflation.

“They’re (banks) very leveraged to the economy, and we’re coming into a soft patch. Earnings will be challenged. They’re almost trading at all-time valuation highs as the economy is heading into a slowdown. It’s quite unusual,” Liu said.

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