Australian Bank ‘Rally to Fade’ as Rate Cuts Crimp Margins

(Bloomberg) -- Back-to-back interest-rate cuts -- and the possibility of more to come -- have Credit Suisse AG feeling gloomy about Australia’s banking sector.

With interest rates at a record low of 1%, banks are reaching the limit on how much they can reduce rates on deposits, which they rely on to fund their loan books. Australia & New Zealand Banking Group Ltd. was the only bank among the nation’s big-four lenders to pass on in full the Reserve Bank of Australia’s latest quarter-point cut.

Earnings forecasts for Australian banks were lowered by as much as 5% after the RBA decision because of the likely impact on margins, Credit Suisse analysts wrote in a note dated July 8.

“The ability of the banks to pass through the majority of the cut is severely hampered in our view unless further material earnings impacts are felt or the impact of each subsequent cut is dampened,” according to the firm. The market is pricing in another cut within the next six months.

Shares of Australia’s banks have gained this year -- albeit at a slower pace than the country’s equity benchmark -- after an inquiry into decades of wrongdoing stopped short of demanding a structural overhaul in the industry. The incumbent center-right government’s surprise election victory in May also gave bank shares a boost. Credit Suisse doesn’t expect that performance to continue as the June and July rate cuts begin to impact profits.

“With earnings downgrades to come in the next six months, we expect the rally to fade as the reality of historically low interest rates hits the bottom line,” Credit Suisse said.

To contact the reporter on this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Tim Smith, Lianting Tu

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