Banks and borrowers stable as rates rise

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A higher rate profile doesn’t worry Morningstar equity analyst Nathan Zaia from a credit quality perspective, as borrowers are starting this rate cycle on “as good as you can hope.”

“We’re definitely going to see loss rates go up, but I don’t think there’s any reason to believe it’s going to go back to the highs we saw during the global financial crisis or anything like that,” he said. -he declares.

“On average, banks’ loan portfolios are very strong, the average loan-to-value ratio is very low, people are ahead of their repayments and they are very well provisioned.

“Stress will likely be felt by a smaller percentage of their book.”

Mr. Zaia said loans originated in the last 12 to 24 months presented the greatest risk, given the decline in price appreciation and utility assessments made at lower floating rates.

The full strength of the Reserve Bank’s monetary tightening will become clearer over the next six months from a net interest margin perspective. Morningstar expects the ABC’s NIM to rise to 1.95% next year from 1.9%.

“There is always price competition and many refinances are going to take place. Banks have headwinds, but earnings on the deposit book should largely win out,” Zaia said.

Renaissance Equity Income portfolio manager Dermot Ryan called CBA’s results strong. His concerns relate to smaller challenger banks, noting the falls in Suncorp’s NIM and AMP benchmark to aggressive competition.

Suncorp’s banking arm, which is to be sold to ANZ, contributed the majority of its profits thanks to strong growth in home loans. And NAB’s third-quarter profit hit $1.8 billion, but its own nod to weak margins led to a cold reaction from investors.

The strong numbers and low arrears reported by financial services may appear at odds with plummeting consumer sentiment, which the August Westpac-Melbourne Institute survey found this week had returned to pandemic levels.

Even so, property portal REA Group has defined its outlook on the property market as price weakness coupled with strong fundamentals. Along with the ballast provided by high household savings, he argued that low unemployment and improving migration would support demand for residential goods.

Turnaround story

As banks dominated the second week of the earnings season, Mr Ryan said the big story was the turnaround of Australian insurers after two difficult years plagued by COVID-19 and wild weather claims.

QBE unveiled a drop in profit to $151 million ($213 million), from $441 million in the six months to June 30, due to heavy hits in investment markets, mimicking the results of other insurers such as Suncorp.

But insurers are on the eve of a fortuitous inversion of results, benefiting strongly from the rises in premiums and the rise in tariffs.

“Insurance is an industry that’s been on the back burner for a while, but it’s definitely improving,” Ryan said.

“Loss levels have been high, but they seem to be leveling off, which is positive for profitability. We saw a good profit from IAG and one of the cleanest results in years from QBE, which is very encouraging as they have broad global exposure to this rate tightening.

Ryan adds that insurers are reaping investment returns of around 3% on their reserve portfolios.

“It’s encouraging because it means they’re getting a floating base of yield and income from reserves, which increases the likelihood.”

While rising rates are good for some sectors, they spell trouble for others. Several real estate investment trusts reporting this season have decried rising debt costs and issued cautious guidance.

Real estate trusts are particularly vulnerable to rising rates – which weigh on their cost of borrowing – and to inflation, which can prevail over rental income.

Meanwhile, Computershare’s margins are expected to benefit from the rate hike, but the stock fell 4.85% in post-earnings trading on Wednesday and another 5.1% on Thursday after investors turned to evidence of high cost pressures.

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