Banking Sector Outlook

Retail banking profit margins will struggle as a reduction in interest rates, results in lower profits, due to lower net interest income.

This week the Reserve Bank warned that banks face fresh risks of business insolvencies and tighter margins from record low interest rates.

“The resilience of the banking system up to now doesn’t mean that risks have passed,” Mr Kearns said.

“We’ve had the largest contraction in global output since the Great Depression. And as that impairs some households’ and businesses’ ability to repay their loans, the liquidity phase of the crisis is giving way to a solvency phase.”

US banks report earnings tonight and we’ll analyze the breakdown in profits from investment activities versus retail banking. This will be a key determinant in global fund managers deciding to sell into this result or hold existing long exposure within the sector.

A reference point to consider will be tracking the ASX listed MVB ETF. The suggested approach is to stay long the sector but re-evaluate, should we see the price action trade below the 10-day average.

Further updates will be provided following tonight’s US bank results.

Bank Shares Roiled On Royal Commission Announcement

Shares of the “big-4” banks are trading sharply lower as the Government announced a $75 million Banking Royal Commission before the ASX open today.

When making the announcement, PM Turnbull said it was a regrettable but necessary action.

The terms of the inquiry are wider than the market expected and will include the entire financial services sector. The final report will be due in February 2019.

We have been giving the banks a wide berth recently due to likely headwinds from slower loan growth and falling profit guidance. We’ll continue to watch the ALGO engine for trade updates and future levels to enter the market.

MVB Aussie Banking ETF



Softness For Housing Credit

The Reserve Bank of Australia has released its financial aggregate data. Over the 12 months to May 2017, total credit provided to the private sector increased by 5.0%.

However, for the first time since 2011, the annual growth in dwelling loan approvals turned negative. This has also coincided with a slowdown in loan size growth.

We’re likely to see softer housing credit growth over the next 6 to 18 months.

The major banks  have responded to the lower housing loan growth by  announcing mortgage re-pricing starting with investor & interest only loans.

We believe the net-net impact on bank earnings will result in flat EPS growth over the next 12 – 24 months with the unknown risk being the potential pick-up in bad-debt provisioning.

Chart – MVB