Australia's biggest lenders are likely banking on a stronger economy to fuel investment demand after the central bank hiked its benchmark interest rate for the first time in over a decade.
Australia and New Zealand Banking Group Ltd., or ANZ, which reported a 3% year-over-year fall in cash profit in the fiscal first half ended March 31, said it is preparing for a "very different" operating environment, though it is well placed to take advantage of higher interest rates.
"A higher interest rate environment globally will likely see industry margins expand and extend higher inflation signals," ANZ CEO Shayne Elliott said at a May 4 post-earnings call. "As a company that is clearly tied to macro outcomes, we will need to change our business settings and investment priorities."
The lender expects growing demand to bring to an end the "investment drought" in Australia that began a decade ago, Elliott said, adding the bank is already seeing stronger demand from corporates.
"ANZ's earnings should remain strong relative to international peers. The bank's net interest margin is likely to improve on the back of rising interest rates," S&P Global Ratings said in a May 4 note.
The Reserve Bank of Australia raised its benchmark cash rate to 0.35% from a record low of 0.10% on May 3. The central bank surprised analysts with a steeper-than-expected hike, with its governor, Philip Lowe, saying in a statement that "inflation has picked up more quickly, and to a higher level, than was expected." Many central banks, including the U.S. Federal Reserve, are likely to accelerate monetary policy normalization amid high inflation, economists said. Rising prices of commodities, however, help the economies of suppliers such as Australia.
"The rate increases will bring some welcome margin relief to the banks," said Nathan Zaia, equity analyst at Morningstar.
Passing through
All four of Australia's big banks have already said they will pass on the rate increase. Commonwealth Bank of Australia said May 3 it will increase its home loan variable interest rates by 0.25% per annum, effective May 20. ANZ and Westpac Banking Corp. followed with the same increase in variable interest home rates. National Australia Bank Ltd. announced May 4 it will also raise its standard variable home loan by 0.25%. Given that deposit rates may not rise as much, margins will begin to improve, Zaia said.
The risk is that rising interest rates can also push banks' credit losses higher. "Some customers will find the inflation and interest rate shifts challenging after decades of downtrend and this is when the tough decisions we've made on customer selection and long term risk management will pay dividends," ANZ's Elliott said.
"Given low unemployment and households on average ahead of loan repayments and with savings built over during COVID, we don't expect a material increase in arrears or defaults," Zaia said.
Home loans portfolio
Meanwhile, ANZ said the bank is making improvements in its home lending portfolio after its reliance on manual processing saw it miss the country's property market boom. During its year-end report, the bank admitted it did not prepare well for the active property market as its home lending growth last year was the lowest among the four major banks.
"Investments in our home loan processing capacity in Australia drove positive balance sheet momentum while processing times are comparable to our major peers. We are on target to grow in line with the Australian major banks by the end of our financial year but will do so with an eye to our margin performance," Elliott said.
ANZ said it had provided 92,000 new home loan accounts, making it the third largest home lender in the market. It increased its home loan processing capacity by 30% with assessment times now in line with major peers.