Australian banks are entering reporting season with valuations approximately 40 per cent above historical averages, presenting limited upside at the index level, according to UBS analyst John Storey. Despite this broad outlook, Storey suggests that stock-specific opportunities persist within the sector. He anticipates consensus estimates now reflect net interest income growth of approximately 3 to 4 per cent year-on-year.
Storey projects a 10 basis point net interest margin contraction through to FY30. Within the major banks, Commonwealth Bank (CBA) is forecast to deliver the strongest result, with earnings growth around 2 per cent. Judo Bank, which provides lending solutions to small and medium-sized businesses, is expected to achieve approximately 30 per cent growth.
Recent earnings revisions have been driven by increased net interest income assumptions and decreased cost expectations, particularly for ANZ. Additionally, anticipated credit charges have eased due to stronger economic data. UBS expects that guidance on costs, including the impact of wage inflation and investment spending, alongside sensitivity to interest rates, will significantly influence share price reactions.
Bendigo and Adelaide Bank is considered the most vulnerable to cost shocks, particularly in light of recent anti-money laundering and counter-terrorism financing (AML/CTF) issues. Investors will be closely monitoring bank commentary and forward guidance during the upcoming reporting season for indications of future performance and potential risks.
