Despite the positive Coalition re-election, benign Royal Commission recommendations and manageable housing-price correction, forward earnings growth is negligible given slowing credit growth, fading NIM, fee cuts, normalising treasury, higher regulatory costs, rising software amortisation charges and normalising loan losses. More to the point, Australian policy interest rates are set to decline, and while banks generally hedge this earnings risk, declining bond yields on hedging portfolios create yet another unappreciated structural NIM headwind.
Business unit divestments, stalled dividends and discounted Dividend Reinvestment Plan scrip issues prima facie see the banks well placed to meet Apra’s Level 2 10.5% ‘unquestionably strong’ CET1 target by the January 2020 timeline. However, the Reserve Bank of New Zealand’s proposal to increase New Zealand bank capital is problematic, particularly for ANZ. APRA’s implementation of ‘Basel 4’ looks problematic for Westpac. Similarly, Apra’s Total Loss Absorbing Capital proposal is challenging given the quantum of the implied increase in subordinated debt issuance.
Low interest rates have pressured bank business models and valuations globally – upwards home-loan repricing has thus far preserved Australian bank ROEs but the prospect of an RBA official cash rate at 1% or below, and even spot 2-, 3- and 5-year bond rates, are particularly challenging. At March 2015 peaks, Australian bank premium valuations were the greatest of all time, whereas now the outlook is gloomy.