‘Things are going to get worse’ for Aussie banks, warns asset manager

Chris Haynes, head of Australian equities at Equity Trustees Asset Management, is cautious about the domestic banking sector. He said that while Australian lenders are not experiencing the same levels of stress as their US counterparts, the outlook is still bleak.

“The banks have all reported very solid first-half earnings. Profits rose, dividends increased and excess capital was generated,” Mr Haynes told Mortgage Business.

However, in the coming months, he believes that most of the positives will reverse and become headwinds.

“After all those rate rises there was hardly any sign of distress in any of the lending books,” he said. “Indeed, none of the major banks had more than 1 per cent of their loan book in 90+ day arrears.

“But we know from here things are going to get worse.

“Bad debts will rise.”

The head of Australian equities, who has almost 30 years of portfolio management experience, conceded that it was difficult to be bullish.

“Will it be a soft or hard landing? Things could get quite a bit worse so it makes sense to be cautious. We do know for certain that the purple patch of rising margins has now finished. Margins are in decline. We have deposit competition and mortgage competition at the same time. Cost pressures seem to be more under control but margins and bad debts will make things difficult,” he said.

In terms of value, Mr Haynes said that, aside from CBA, Aussie bank stocks were looking cheap and may become cheaper.

Meanwhile, US regional banks face major challenges after making a macro bet that interest rates would remain low. They acquired large amounts of fixed-rate liquid securities but didn’t hedge them. They then got caught when rates rose at perhaps the fastest pace in history, causing a crisis of confidence and bank runs.

AMP chief economist Shane Oliver recently warned that the Reserve Bank should be more concerned about the US banking crisis than it appears to be.

“A big factor in central bank thinking should be ongoing US banking stress,” Mr Oliver said.

“While the takeover of First Republic Bank by JP Morgan went smoothly with depositors protected, it and the prior ‘rescues’ leave big issues unresolved and festering away.

“First, it’s unclear how the US government can pay for the deposit protections etc running the risk that Congress will get involved. Second, and far more importantly, it’s adding pressure on other banks to be more cautious in their lending to avoid going the same way.”

Frank Danieli, head of credit investments and lending at MA Financial, believes the current environment has created a number of openings for alternative funders.

“This creates selective opportunities where otherwise high-quality borrowers and companies cannot access financing, which credit funds and institutional financiers can step in to solve,” Mr Danieli said.

“This is enabling lenders to earn better returns on loans with good collateral, asset-backing for downside protection and robust debt terms.”

However, recent jobs data could suggest that the Australian economy is already headed towards a recession. The unemployment rate rose to 3.7 per cent in April.

“Our concern is that the jobs market and inflation are lagging indicators and the RBA is not paying enough attention to the way interest rate hikes hit the economy with a lag. This in turn runs the rising risk of knocking the economy into a recession,” Mr Oliver said.

[Related: Big banks laser-focused on arrear rates]