Banks look bulletproof, at least as long as rates and unemployment stay low

generic banking big four banks, CBA, Westpac, NAB, ANZ. Thursday 24th September 2015 afr photo Louie Douvis AFR
generic banking big four banks, CBA, Westpac, NAB, ANZ. Thursday 24th September 2015 afr photo Louie Douvis AFR

Whatever you think of the big banks as corporate citizens, they sure make oodles of money for shareholders.

Part way through the banks' reporting period, despite the scandals and challenges, the sector is in good health.

Last week, ANZ reported an 18 per cent increase in its full-year cash profit to September 30 to $6.9 billion.

NAB will announce its result this Thursday with the market expecting a profit of about $6.6 billion.

Next week, it's Westpac's turn with the market expecting a profit of about $8 billion.

Commonwealth Bank, which has a financial year reporting period, posted earnings of just under $10 billion in August.

A feature of the results of ANZ and of CBA is the low level of bad and doubtful charges.

Another is how they are benefiting from increasing the prices of their mortgages.

They have been increasing the interest rates on their interest-only investor mortgages at the behest of the Australian Prudential Regulatory Authority (APRA).

That's because property investors are partly behind pushing house prices out of the reach of many first-home buyers.

The banks say they are not profiting from the opportunity provided by the regulator to increase mortgage interest rates. And they are not saying much on whether they will pass on the government's bank tax, which came into effect on July 1, to their customers.

Though the big banks' share prices dipped this year, three have since recovered to close to where they were are the beginning of the year.

The exception is CBA, whose share price fell price fell in August after a government regulator said it was taking legal action for alleged breaches of anti-money laundering laws. CBA's share price has recovered, somewhat, to about $78 now from about $83 at the start of the year.

Matthew Haupt???, portfolio manager at Wilson Asset Management, reckons the profit season could see big bank share prices rise, at least in the short term.

The key measure of bank profitability is the net interest margin - the difference between interest paid by borrowers and the cost of funds.

While the margin has been falling, the re-pricing of mortgages has reversed the trend so that net interest margins are rising.

Haupt says that gives particular "tailwinds" to Westpac and CBA, as they have the biggest mortgage books.

Given their strong capital positions, the banks still to report will at least maintain their dividends, he says.

And while interest rates stay very low, it's likely the banks' bad and doubtful debt charges will remain very low, Haupt says.

Even though he thinks the share prices of the big banks will go a bit higher in the short term, there are longer-term risks.

Interest rates are at an all-time low and the jobless rate is low.

Interest rates are on hold, but eventually they will rise. Haupt says if they were to rise fairly quickly and the jobless rate was to increase, the banks' bad debt provisions would rise, affecting their profitability.

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This story Banks look bulletproof, at least as long as rates and unemployment stay low first appeared on The Sydney Morning Herald.