BIG FOUR BATTLE HEATS UP

Warning over higher technology costs

The banks, Australia’s money machines, have seen their earnings peak as interest rates and red hot competition take them back to earth, with market watchers warning the industry faces a profit pinch point as the need for spending on tech and systems looms large.

The latest reporting cycle saw the big majors rule off a combined $15bn in profits, down 10.5 per cent from their peak in the first half of 2023, with industry watchers warning the coming months will show the strengths and weaknesses of big players.

All the banks called out the red hot competition in the sector that has driven the industry into a home loan feeding frenzy, with the banks posting double digit declines in the performance of their personal banking businesses.

Net interest margins across the sector were crunched, as banks faced a squeeze from deposits as savers rushed to get the best rates, while the rise of brokers led more borrowers to decide on the lowest cost loan. The only bright spot for many was business lending, riding high on benign conditions, despite the gloom around consumer spending.

But despite all this investors continue to pile in, with Wilson Asset Management Leaders Fund portfolio manager Matthew Haupt noting the slew of buybacks announced in the latest results cycle would support share prices for the time ahead.

But he warned the banks are “extremely expensive” with earnings figures failing to impress.

“It’s hard to get too excited about them,” Mr Haupt said.

“For me it’s all about capital management, it’s not really around their earnings.”

ANZ’s $2bn buyback bonanza came alongside NAB’s $1.5bn sweetener topping off the bank’s earlier $1.5bn market raid which itself came after an earlier $2.5bn foray. Westpac also announced it would plug a further $1bn into its shares.

Despite warnings valuations for the big banks had likely topped out, Mr Haupt said it was the non-bank sector that was facing the bulk of the pain set to flow through the economy.

He said these lenders, which had stepped in to replace the banks in lending to non-prime borrowers and bankrolling commercial property markets, were heavily exposed to a potential downturn.

“You’re going to get arrears, stress and more regulation,” Mr Haupt said.

Suncorp Bank reported on Friday it had seen a $85m worsening in arrears across its loan book driven by home borrowers.

Another challenge facing the banks, according to Deloitte Australia national banking sector lead David Myers, is that many are sitting on ageing legacy systems and face significant tech spends.

“The other piece ... is frauds and scams, that will continue to put pressure on how much they spend,” he said.