The problem for banks, following last week’s cash rate cut, is that they can’t cut the rates on all their deposits, in line with the cuts to mortgage rates. Their margins are being squeezed.
In its commentary on the impact of last week’s monetary policy decision, Macquarie Securities says the banks are caught in a margin squeeze “relating to deposit price elasticity”.
Macquarie says: “The key risk for banks in a lower rate environment is from potential elasticity around deposit pricing. That is, banks need to maintain higher deposit rates to preserve their deposit market share and growth.
“With every interest rate cut it becomes more difficult to adjust deposit pricing, as many deposit rates approach zero. We assume about 20 per cent of deposits would not be repriced.”
It says that all else being equal, the 25 bps reduction in rates will reduce the majors’ profitability by 2 to 3 per cent, and regional bank profitability by 4 to 7 per cent.
“However, the next 25 bps cut would have a cumulative impact on earnings of 5 to 7 per cent for the majors,” Macquarie says.
“In a low rate environment banks generally deliver sub-optimal return on equity and trade at an elevated discount to market.”
Allowing for different hedging strategies used by banks, the impact on earnings from lower rates is different for each bank.
Assuming another 25 bps rate cut, and 21 per cent of deposits not repriced, Macquarie estimates the following earnings impacts:
- ANZ’s earnings would be down by 1.8 per cent this financial year and 4.9 per cent in 2019/20;
- Commonwealth Bank’s earnings would be down 2.5 per cent this financial year and 7.4 per cent in 2019/20;
- NAB’s earnings would be down 3.8 per cent this financial year and 8.6 per cent in 2019/20;
- Westpac’s earnings would be down 2.2 per cent this financial year and 5.8 per cent in 2019/20;
- Bendigo and Adelaide Bank’s earnings would be down 1.9 per cent this financial year and 14.4 per cent in 2019/20; and
- Bank of Queensland’s earnings would be down 2.4 per cent this financial year and 9.3 per cent in 2019/20.
Macquarie says ANZ’s decision to only pass on 18 bps to borrowers should largely offset its earnings pressures but it sees downside risk to volume growth.
Macquarie has assumed that banks will re-price their mortgages at some point, by 10 to 15 bps. Factoring that in, it has downgraded its earnings forecasts for all six banks for the current financial year, the next and the one after that.