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Australia’s financial sector is up 1.2 per cent today with strong gains across the big banks and insurers.
Bendigo and Adelaide Bank is up 1.8 per cent, Suncorp is up 1.6 per cent, NAB is up 1.4 per cent, and Westpac is up 1.2 per cent.
Commonwealth Bank was back at four-month highs of $107.30 this morning, but the gains have eased this afternoon for the stock to be 1 per cent higher are $106.78.
“We will take the necessary steps to ensure a return to price stability”, chair Jerome Powell said in a speech last night. Credit:Bloomberg
These moves follow a report from Macquarie’s equities analyst team predicting earning upgrades from the banks in 2022-23 due to rising interest rates. Overnight, US Federal Reserve Chair Jerome Powell said the central bank would raise its benchmark short-term interest rate faster than expected, and high enough to restrain growth and hiring, if it decides this would be necessary to slow rampaging inflation.
Macquarie’s team has analysed rising rates and credit growth in the past five hiking cycles in Australia and found credit growth (lending) peaked at the beginning of the cycle then took up to 16 months to trough. The biggest fall in credit growth was -61.8 per cent from the 1994 hiking cycle.
“Extrapolating this to the prevailing conditions suggests that credit growth will likely peak in the next few months and should moderate at about 3 per cent to 5.5 per cent by the middle of 2023,” the team wrote in a note for clients.
And, while rising rates normally squeeze margins, they believe it is possible for Australian banks do well until the Reserve Bank lifts rates above 1 per cent. Early growth in deposits will also help bank profits due to the lag in passing higher rates onto depositors.
Macquarie’s analysts see “upside risk to consensus expectations in the early part of the rate cycle” and have ‘outperform’ ratings on NAB and ANZ, ‘neutral’ on Westpac and ‘underperform’ for Commonwealth Bank with a $90 price target, about $17 below today’s price.
But, they are predicting Commonwealth Bank dividends will grow to $4 a year by 2022-23, up from $3.50 in 2020-21.
Both Bendigo Bank and Bank of Queensland are rated ‘outperform’ with target prices within $1 of today’s prices.
with AP