Via Macquarie:
The party is almost over
Past tailwinds to turn to future headwinds The major’s ability to reprice mortgages has provided a significant backdrop to their earnings growth over the past decade. However, as we approach the end of the current repricing cycle we expect banks will need to focus on other avenues to support earnings growth (ie. expense management). Moreover, we expect the recent mortgage repricing tailwinds to turn into headwinds over the medium term as current levels of mortgage profitability appear difficult to sustain. Particularly as mortgage books are likely to re-weight towards lower margin P&I products over time. We expect those trends to reduce return on common equity by 1-2% over the medium term with WBC being most impacted and ANZ least impacted. As a result our medium term investment thesis favours exposure to retail underweight banks (ie. NAB and ANZ).
