Australia’s bank profits seen doubling after COVID-19 hit

SYDNEY, April 30 (Reuters) – Three of Australia’s Big Four banks are set to unveil a more than doubling in interim profits, higher dividends and lower provisioning for bad debts next week, as the economy recovers from the COVID-19 pandemic.

Australia’s economy has emerged from recession and all signs are that 2021 has started on a firm footing helped by massive monetary and fiscal stimulus. The government’s successful virus containment efforts, soaring house prices and improved job market have helped to boost consumer confidence and spending.

The country’s financial institutions have now largely recovered from a damaging Royal Commission inquiry into the sector that in 2018 uncovered widespread misconduct, leading to numerous class actions and penalties over the past two years.

On Monday, Westpac Banking Corp will kick off earnings where writebacks for loan provisioning will help drive cash earnings for the six months to March 31 to about A$3.28 billion ($2.56 billion), according to a Reuters poll. That will be more than triple its interim cash profit a year earlier.

Australia and New Zealand Banking Group is due to report on Wednesday, with analysts expecting a more than doubling of its interim profit to A$3.19 billion.

National Australia Bank (NAB) will follow on Thursday, with interim earnings expected to surge to A$3 billion, also more than doubling from the previous year.

The profit recovery at Westpac, Australia’s second-largest bank, will likely be accompanied by a 86% hike in promised dividends to 58 cents per share, according to an average forecast of six analysts.

Expectations are for NAB to declare a 56 cents per share interim dividend, up from 30 cents per share last year. ANZ is expected to promise shareholders 63 cents per share, versus an interim of 25 cents last year.

Westpac, which has lagged its peers due to complex and inefficient systems, is expected to unveil a cost-focused restructuring strategy to cut costs and turn its business around.

Expectations of higher profits and dividends driven by red-hot house prices and low interest rates have already pushed the banks’ share prices to near their pre-pandemic levels of early 2020.

Australian bank shares had fallen out of favour last year when the pandemic forced entire sectors of the economy to shut down, prompting the central bank to cut rates three times to a record low 0.1% and inject cash into the economy.

LOWER PROVISIONING EXPECTED

Analyst said optimism over loan repayments as employment and housing markets recover are set to drive a reversal in provisioning by banks for non-performing loans.

As huge COVID-19 loan loss provisions become redundant in a recovering economy and are added back to profits this year and next, bank profit forecasts could be upgraded by up to a further 30%, analysts said.

“The world has changed and the level of credit stress is significantly lower than anybody had imagined,” Citigroup banking analyst Brendan Sproules said.

The three banks reporting next week took a combined A$5 billion hit in bad debt charges in the first half of 2020 alone, to account for possible loan losses. That number will fall to about $600 million in this first half, BofA Securities said.

“There is further scope for banks to generate low bad debt charges and positive surprise, but there is still some hesitation on very large releases of provisions at this juncture because of residual risks of the health crisis and the economic crisis.” BofA Securities banking analyst James Ellis said.

Underlying earnings are expected to show modest growth too, as the hot housing market drives a surge in home loans while bank funding costs remain at record near-zero levels.

Commonwealth Bank of Australia, the country’s largest, has a different fiscal calendar but earlier this month said that higher home loan sales would boost its mortgage profit by about 3%.