The ongoing earnings recovery at Australia's major banks may gather steam as the economy bounces back from its first recession in 30 years and global demand for commodities such as iron ore, copper and natural gas rises.
Three of Australia's major banking groups reported improved cash earnings for the fiscal first half ended March 31, helped by the country's economic recovery from the COVID-19 pandemic and lower notable charges. Australia and New Zealand Banking Group Ltd., Westpac Banking Corp. and National Australia Bank Ltd. all said that credit impairment writebacks boosted their profits in the period.
The earnings reports from the big banks show "a trend of lower bad debts and provision releases which boosted earnings, a benefit from lower deposit pricing which improved net interest margins, and also a greater focus on cost reduction targets," said Omkar Joshi, portfolio manager at Opal Capital Management.
National Australia Bank's cash earnings for the period rose 94.8% year over year to A$3.34 billion after it recorded a credit impairment writeback of A$128 million, compared with a A$1.16 billion charge in the prior-year period. ANZ bucked its previous warning of an A$817 million reduction in cash profit to report a 112.1% year-over-year increase in cash profit from continuing operations to A$2.99 billion. Westpac's first-half cash earnings more than tripled year over year to A$3.54 billion as it reported an impairment gain of A$372 million for the fiscal first half, versus A$2.24 billion of impairment charges it recorded in the year prior.
Commonwealth Bank of Australia, which follows a different results cycle, reported in February that its cash net profit for its fiscal first half ended Dec. 31, 2020, fell 12% to A$3.98 billion as earnings were impacted by lower interest rates and the COVID-19 pandemic.
Risks remain from a weak revenue environment and a potential increase in bad debts for Australian banks. "While margins have improved considerably, ongoing pressures remain, especially if cash rates continue to stay low," Joshi said. "The economy is still recovering from the lockdowns and while it appears to have fared better than expected, there is always the potential for bad debts to rise in the future," he added.
GDP grew 3.1% in the fourth quarter of 2020, the Australian Bureau of Statistics said in March. Stimulus measures and the country's success in containing the COVID-19 pandemic helped. The Reserve Bank of Australia revised its GDP forecast after its members noted that the economy was transitioning from recovery to expansion earlier than expected, according to a statement on monetary policy released May 7. The central bank now expects GDP to grow by around 4.75% over 2021, up from its previous guidance of 3.5%. As the global economy recovers from the pandemic, commodity prices have rallied and that will help Australia's resources sector, which makes up over 8% of the nation's economy.
"We believe that the recovering economy, falling unemployment, and improved consumer and business sentiment will largely offset the risks [to banks] posed by the fiscal support and loan repayment moratoriums coming to an end," S&P Global Ratings said in a May 3 note on Westpac's earnings.
Meanwhile, some Australian banks have also announced they are placing higher emphasis on cost control. Westpac unveiled an ambitious cost-cutting plan that aims to have a cost base of A$8 billion by 2024, down from A$12.7 billion in the last fiscal year ended September 2020. ANZ previously announced that it aims to run the bank for less than A$8 billion by 2022, though it said in October 2020 that it may miss that cost reduction target.
Nathan Zaia, a senior analyst at Morningstar, said it is a coincidence that both Westpac and ANZ ended up with an A$8 billion cost target. "Given Westpac is a larger bank, I think it illustrates how tall an order it is going to be for Westpac to get costs down to that level," Zaia told S&P Global Market Intelligence in an email. He said "execution will be key here" for both banks as such cost targets should not come with a loss of market share or missed opportunities for growth.