Banks: FY21 reporting season and beyond

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
26 October 2021, 7:00 AM
Sectors Covered:

  • Westpac (ASX:WBC) is our preferred major bank. We expect WBC to announce a $5bn off-market share buyback on 1 November and we expect investors to increasingly warm up to WBC’s medium-term cost out story.
  • Strong balance sheets, robust dividend yields, capital management and medium-term cost out potential remain key attractions for the sector in our view.

System home loan growth outlook

System home loan growth improved to 6.2% over the 12 months ended 31 August 2020 compared with 3.2% over the prior comparative period. More recently, system home loan growth has been running at ~7.2% pa.

While APRA’s recent macroprudential tightening may put a halt to the acceleration in system home loan growth, it is quite possible that the tightening will not be enough to take system home lending below 7% pa.

We also note that Sydney and Melbourne emerging from lockdowns and immigration looking set to restart are likely to be growth-positive events.

We therefore believe that further macroprudential tightening is on the cards.

We are currently forecasting system home loan growth of 5% pa over FY22 and FY23.

Net interest margin outlook

The key sector NIM headwinds are the front to back book differential in home lending as well as the mix impact of switching from variable to fixed rate home loans. 

While low interest rates have been a key NIM headwind for some time, we believe this headwind is now dissipating with rising swap rates.

Rising swap rates have also resulted in recent repricing up of fixed rate home loans. Whilst such repricing appears to be broadly NIM-neutral at this stage, we see scope for NIM-positive fixed rate repricing if swap rates continue to rise.

We also see potential for NIM-positive repricing of home loans if there is further macroprudential tightening from APRA.

We expect low-cost customer deposit growth to remain strong in the near term relative to credit growth, resulting in a positive impact on NIMs from favourable shift in funding mix.

We expect to see reductions in the average cost of wholesale funding for the major banks from 1H21 to 2H21 as a result of Term Funding Facility (TFF) drawdowns and maturing term debt.

Subdued Markets income may be partially offset by higher M&A activity

We expect subdued volatility in currency and interest rate markets to weigh on Markets & Treasury revenue in 2H21.

However, we see scope for some of this revenue softness to be offset by higher M&A-related revenue stemming from loan syndications and debt capital markets.

Potential for further collective provision release

We expect underlying asset quality trends to remain sound across the major banks in the near term. 

While we are generally assuming that collective provision (CP) coverages of credit risk weighted assets will remain unchanged, we see potential for further CP release particularly as coverages remain at least 30% higher than pre-pandemic levels.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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