Banks may avoid passing on full rate cuts – report

Major banks are considering strategies to protect their net interest margins

Banks may avoid passing on full rate cuts – report

Major banks are considering strategies to safeguard their net interest margins in the face of anticipated interest rate cuts by the Reserve Bank. Fidelity International, a financial services firm, has highlighted the possibility that banks may not fully pass on rate cuts, given the contraction of net interest margins despite recent rate rises.

Economists at the big four banks share the belief that the Reserve Bank of Australia has concluded its rate rising cycle and is likely to implement a cut in the current 4.35% cash rate in the latter part of 2024, according to a report by The Australian.

Zara Lyons, an analyst and portfolio manager at Fidelity International, expressed the potential scenario where banks might opt to reduce home loan rates by only 15 basis points if the RBA were to slash the official cash rate by 25 basis points.

“It is a real possibility that we could see that,” she told The Australian. “It’ll be a game of chicken on who is the first bank who wants to upset everyone by being out of cycle in terms of not passing on rate cuts.”

The pressure on banks to protect their net interest margins stems from the expectation of earnings and profitability coming under strain in the upcoming year. The ongoing competition for deposits and the shift of customers to higher-yielding deposit products have contributed to the pressure on net interest margins, The Australian reported.

Notably, major banks such as ANZ, Commonwealth Bank, Westpac, and NAB have reported contractions in their net interest margins in recent months. ANZ, for instance, reported a decline in its net interest margin from 175 basis points to 165 in the 2023 financial year, largely attributed to the impact from Australian and New Zealand housing loan pricing.

Read next: RBA won’t rush to follow Fed in rate cuts – Westpac

The anticipation of no further rate rises ahead of the reporting season has led to market expectations, but the possibility of a surprise rate increase by the RBA could disrupt share prices, Lyons told The Australian. Additionally, the upcoming reporting season will test the buybacks of shares announced by Westpac, National Australia Bank, and ANZ in recent months, as their earnings will be scrutinised to validate the price to earnings ratios that banks have been trading on.

Fidelity International expects banking share prices to remain range bound in 2024 due to declining earnings, coupled with strong wage growth, expenditure on technology, and the stabilisation in rates and funding costs.

Meanwhile, analysts at Macquarie foresee potential guidance upgrades from the companies during the reporting season, but caution that optimism may have pushed some stocks too far ahead of earnings, The Australian reported.

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