The regional banks remain at a structural disadvantage to the majors, despite the benefits from a recovery in housing finance, lower funding costs and improving loan quality.
In its outlook for financials, Morningstar stated that the regionals are experiencing below-system growth and are unable to compete with the “distribution networks, existing customer bases, multi-product offering and pricing power of the majors”.
Morningstar said the slower loan growth of the regionals likely reflects their restraint in not taking on the higher-risk customers that the majors turn away – something they have been guilty of in the past.
The outlook said the regional banks will continue to use acquisitions as part of their growth strategy, with Bendigo and Adelaide Bank recently purchasing Rural Finance Corporation of Victoria and Bank of Queensland acquiring Investec Bank’s specialist finance and leasing businesses in Australia.
“We believe small lenders and wealth management firms are logical targets – increasing scale and presenting cross-sell opportunities,” said Morningstar.
Morningstar analysts said trading conditions for the wide-moat rated major banks “continue to improve, particularly in the more heavily populated eastern states, despite weakening consumer confidence”.
“We are increasingly confident in our fiscal 2015 and 2016 earnings forecasts as low interest rates support modest growth in gross domestic product, lower wholesale funding costs, a tentative rebound in loan growth, benign bad debts and a stronger housing sector,” Morningstar said.