In his analysis of the big four banks’ 2018 half-year results, EY Oceania Banking and Capital Markets leader Tim Dring noted that while combined bank profits were down by 1.7 per cent, net interest margins (NIM) increased by an average of 3 basis points from the 2017 half-year results to 2.03 per cent.
“Home loan repricing has provided a tailwind for net interest margins in the first half of the year,” Mr Dring said. “If the recent increases in wholesale funding costs persist, banks may be compelled to further reprice upwards to address margin and profit pressure — despite the negative response this would likely generate.”
EY noted that disciplined pricing will be required to preserve future earnings as banks balance the need to grow market share with sustaining margins and returns.
Home loan repricing has provided a short-term net interest margin tailwind for the banks. However, competition for new owner-occupier borrowers, the major bank levy, reduced scope for loan repricing in the face of intense scrutiny and future higher risk weights for investor and interest-only housing loans all weigh on margins.
Meanwhile, the majors are forecasting more subdued credit growth over the next few years, adding further pressure on their profitability.
“Stricter standards for loans look set to act as a brake on new lending by reducing customers’ borrowing capacity. Following discussions with APRA, the banks have already stepped up their scrutiny of borrowers’ living expenses, and further tightening may be required,” Mr Dring said.
“Stricter lending standards may also contribute to slower house price growth. House price inflation is already moderating, attributed in large part to the macro-prudential measures aimed at investor and interest-only lending. Muted wage growth, affordability constraints and a possible uptick in interest rates in the short to medium term may depress prices further.”