Three rate cuts between Aussie households and doom?

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MB has been negative on banks and their margins for 18 months or so on rising funding costs, rising bad loans, rising regulatory pressures, squeezed dividends and excessive payout ratios. Morgan Stanley today offers a chart that says it all:

Resilient in Retail, Challenged in Corporate: Retail Banking Services (RBS, ~42% of income) profit proved more resilient than we feared in 2H16 due to margin expansion of ~3bp h-o-h. In contrast, Corporate Banking (IBM and BPB, ~27% of income) margins fell by 13bp which saw revenue rising only ~4% despite ~10% increase in loans. In FY17E, we believe RBS faces more broad based margin headwinds and we expect Corporate margins will continue to decline.

Falling margins across the group: Our Chart of the Week shows our divisional forecasts for CBA’s margins. We expect CBA’s group margins to decline by ~4bp in FY17E and our forecasts assume a: (1)3bp deterioration in RBS margins with a 14bp benefit from announced and future re-pricing more than offset by mortgage and deposit competition and lower RBA cash rates; (2) 9bp margin decline in Business and Private Banking, which is partly due to the 12bp h-o-h decline in 2H16;and (3) 6bp decline in Institutional bank margins which have fallen by ~44bp over the past four years at the same time as loans have grown ~50% (>10% 4-year CAGR).

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.