From Morgan Stanley:
We think retail bank revenue growth will slow and the outlook for business banking remains challenging. The banks are increasing their focus on cost control, but loan losses are bottoming. As such, we think the upgrade cycle has ended. We outline some feedback from recent meetings with bank industry participants:
Retail bank margins: Competition is increasing and “the margin has come out of home loans”. However, the mix shift from higher rate term deposits to lower rate transaction and investment accounts has further to run.
On balance, we think retail bank margins have peaked.
Housing loan growth: APRA’s steps to reinforce sound mortgage lending practices (refer APRA’s Mortgage Measures) will be “supervised hard” and the major banks “won’t ignore” the 10% growth threshold for investment property lending.Expenses: All the banks “are looking at their operating models and getting back to basics”. They want to invest more in new technology and customer initiatives but they “have to take out cost to do it”.
Credit quality and loan loss charges: Overall credit quality metrics are still improving, but the number of “watchlist” loans is now increasing. Loan loss charges will probably bottom “this quarter or next quarter” and there will be some increase in business loan loss rates.
