Interest Rate Hikes to Push Australian Banks’ Earnings by 20 Percent in 2023: Goldman Sachs

A pedestrian walks past a Suncorp Bank branch in Melbourne, Australia, on July 18, 2022. William West/AFP via Getty Images

Financial analysts have forecasted a booming year for Australian banks in 2023 as they allegedly exploit a loophole in the central bank’s interest rate hiking cycle.

Analysts at the global investment bank Goldman Sachs estimated that Australian banks would see a 20 percent surge in earnings this financial year, with a combined profit of $35.5 billion (US$24.63 billion) for the banking sector, reported The Australian.

The substantial profits derive from the practice of delaying and not passing the increases in the official cash rate to savers in full.

Since May 2022, the Reserve Bank of Australia (RBA) has implemented an aggressive monetary tightening policy, taking the official cash rate from the historic low of 0.1 percent to the current 3.1 percent.

While banks are quick to pass on the increases to borrowers, they are allegedly much slower in raising the deposit rates for savers.

In addition, banks employ a number of strategies to avoid passing on the full interest rate rise, such as raising rates for some saving accounts but not others and offering promotional or conditional rates to customers.

People walk past an ANZ Bank in Melbourne, Australia, on Oct. 28, 2021. William West/AFP via Getty Images

As Australian households are holding $1.33 trillion worth of savings, it is not surprising that the rate mismatches will bring about significant profits for lenders.

A report (pdf) by global accounting firm KPMG shows that major Australians made a profit after tax of $28.5 billion in the 2021-2022 financial year, up 7.2 percent from 2020-2021 and 65 percent from 2019-2020.

“Behind the improved profit performance, we are starting to see the impact of rising interest rates,” KPMG wrote.

The accounting firm also noted that the benefit of rising interest rates was only starting to feed into bank profitability, which hints at a higher margin for banks in 2023.

Potential Risks for Banks in 2023

While Goldman predicted 2023 to be a positive year for Australian banks, the company said there were some underlying risks.

As global credit markets tighten, Goldman said banks could be forced to compete against each other for deposit funds, which would result in reduced profits.

“We remain alert to the risk that these trends in wholesale markets result in a reinvigoration of deposit competition, with early signs suggesting this has already started to happen,” it wrote.

“If the latter plays out, how banks respond on mortgage pricing will be the key to how (net interest margins) evolve.”

A man walks past a branch of the National Australia Bank in Melbourne, Australia, on May 6, 2021. William West/AFP via Getty Images

Turning to interest rates themselves, while higher rates are driving up banks’ net interest margins, they can also be an unstable factor bringing down bank profitability.

There have been concerns that if interest rates go up further, households and businesses will stop borrowing, effectively slashing banks’ interest income.

Moreover, higher interest rates will put more pressure on Australians with high levels of debt, causing them to default on loans.

“For now, margin expansion and resilient credit quality underpin the earnings outlook,” Morgan Stanley analyst Richard Wiles wrote, in the Australian Financial Review.

“However, the size and speed of the tightening cycle create the prospect that weaker volume growth, declining margins, higher costs and rising loan losses weigh on the bank’s share price performance in the second half of 2023.”

Consumer Watchdog to Probe Banks’ Deposit Rates

The positive earnings outlook for banks in 2023 comes as Treasurer Jim Chalmers has asked the Australian Competition and Consumer Commission (ACCC) to probe into banks’ deposit rates.

The treasurer also stated that banks need to treat their deposit customers fairly.

“People who rely on their savings bore the brunt of very low rates in the past, and they should see the benefits of higher rates now–it should be the silver lining in all of this,” he said.

This is not the first time the treasurer has called out banks for delaying raising deposit rates for their customers.

In August 2022, Chalmers demanded major banks give customers a fair deal as there was evidence that they were not passing the interest rate hikes since May to savers in full.

Meanwhile, the ACCC said it welcomed the government’s confirmation of an inquiry into the retail deposit market and would look forward to receiving a legal direction from the treasurer.

“This inquiry will provide transparency on these issues,” an ACCC spokesperson told The Epoch Times.