Citi Research's Aussie banking analysts have turned their minds to what impact US President Donald Trump's tariffs and trade war may have on banks.
Citi's Thomas Strong and Nilesh Bhaiya note share market listed Aussie banks have initially outperformed the overall market amid tariff volatility, thanks to their domestic focus and strong balance sheets. This, they say, comes as investors "triage" their portfolios, focusing on shares in companies most directly impacted by the murky tariff picture.
"However, as time progresses, we expect investors will have to examine the second-order impacts of trade volatility, which likely include a slowdown in global and domestic growth as confidence wanes. For bank investors, that likely includes a slowing in credit growth and possible NIM [net interest margin] contraction if the Reserve Bank of Australia moves to cut rates in response," Strong and Bhaiya say.
They note Bank of Queensland (BOQ) reports its half-year results on Wednesday (April 16). As the first Aussie bank to post earnings following Trump's April 2 "Liberation Day," this will force investors to consider the earnings risk to the broader banking sector from a potential slowdown.
"Despite high valuations, we think the bank sector may be perceived as a safe haven for investors. When investors are triaging their portfolio for companies that are directly impacted by tariffs, the now largely domestically focused banks are well down the list of examination – and possibly a safe place to hide. Second-order impacts – such as the implications of a growth shock – are to be considered down the track," Strong and Bhaiya suggest.
They say there's "considerable valuation risk relative to history," citing earnings risk with wide ranging economic outcomes on the table depending on where tariffs ultimately land, how China responds, and how the Australian economy responds.
"To that end, this week pulls bank investors back to the fundamentals. BOQ reports its out-of-cycle first-half 2025 result on Wednesday and, while a lot of issues will be company-specific, it will certainly send investors and analysts back to their models. The outlook will undoubtedly be interrogated as to the potential for a slowdown in demand for credit, possible rate cuts and the sensitivity to NIM. The sensitivity of ECL [expected credit loss] scenarios will also be explored as the world contemplates a greater skew to downside scenarios," say Strong and Bhaiya.
They also note challenges to revenue growth are likely to ramp up the importance of cost control.
"In the absence of the revenue growth, the only controllable variable for banks remains the costs. However, the February results season showed that this is easier said than done, with the majors facing rising operating expenses. Be it from ‘Plus’ [ANZ], ‘Unite’ [Westpac] or otherwise, pressure is clearly on the sector to increase investment, reduce cost-to-serve and digitise."
"Post the Royal Commission in 2019, we have seen numerous drivers of costs from compliance and regulatory costs, inflation and now digital and transformation. Such costs are a necessary investment to doing business. BOQ has taken considerable medicine to reset its cost base and make the necessary investments," Strong and Bhaiya say.
"However, there remains the risk for the broader sector that in the event of short-term economic shocks that drive revenue headwinds, these multi-year investment plans may be difficult to adjust, seeing core earnings headwinds."
Strong and Bhaiya suggest the BOQ result will offer clues on how investors should view the major banks.
"First off, the difficulty for BOQ in growing its mortgage book indicates that while mortgage spreads may have troughed, it is still not at a palatable level for the industry. The sub-cost of capital returns outside of the major banks drives this point home. This outlook is not going to be improved in a potential rate cut environment which would widen the cost of funds."
"However, as the BOQ result will likely indicate, ‘self-help’ – in the form of technology spend and digitisation – is the key to managing core earnings in the current environment. Consequently, we are likely to continue to see cost pressures across the sector despite a slowing revenue environment, as efficiency becomes paramount," say Strong and Bhaiya.
"In the ‘first order’ impact of the tariff-induced market sell-off, bank valuations have come off but still held up reasonably well vs the broader market. However, on Wednesday we expect that questions put forward to management around the impact of rate cuts, credit demand and credit quality will likely have investors contemplating the earnings risk across the banks sector. This will continue to challenge the earnings upgrade thematic that drove bank share prices in 2024, and consequently we remain sell-rated."
ANZ, National Australia Bank and the Westpac Banking Corporation, along with their New Zealand subsidiaries, are due to post their March half-year results in early May. Westpac NZ on Monday, May 5, BNZ on Wednesday, May 7, and ANZ NZ on Thursday, May 8.
2 Comments
Banks are parasitic on the energy/resource flows. As are many of us.
They were tolerated in the growth phase but are likely to be scapegoats in the - inevitably coming - de-growth era.
I used to say - simplistically - that interest-charging cannot be continued into the degrowth era, but that isn't true; they can still charge it - but at someone else's expense. Someone else will be curtailed/compromised. A government looking after its citizens, would legislatively curtail usury, from here on in. The pity is we have this one, whose interests (pun) are not those of the average citizen.
Usury may well curtail itself....creditors are not keen on defaults.
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