Banks jockey for supremacy on home turf
ANZ generates more profit on every dollar lent in the domestic economy compared to its rivals, while National Australia Bank has among the thinnest profit margins from retail lending.
However, NAB will seek to close the gap on its competitors when three of the big banks report their profits in the coming weeks, after signalling it is no longer the price leader on mortgages.
ANZ, NAB and Westpac are expected to announce combined earnings of more than $9 billion this profit reporting season, starting with ANZ's results on Tuesday.
A focus of the results is likely to be the profitability of banks' domestic lending to households, after the Commonwealth Bank's flagship retail bank underpinned its first-half earnings of $3.78 billion in February.
For most of the past four years, ANZ's Australian division - which includes commercial lending - has posted the widest interest margins compared with the other big banks' retail businesses.
NAB has suffered the biggest fall in margins after chief executive Cameron Clyne promised in 2011 to "break up" with the other big banks by having the lowest mortgage interest rates.
Morningstar's head of Australian banking research, David Ellis, said NAB's retail arm's performance was likely to gradually improve, after the bank ditched its promise at the end of last year to have the lowest mortgage rates.
"They've intentionally been targeting low interest rate home loans," Mr Ellis said. "That's an attempt to increase market share but, ironically, despite their very effective advertising campaign they've progressively been reducing that gap between the NAB home loan interest rate and the other banks' [rates]."
Macquarie's bank analyst Mike Wiblin also said NAB's net interest margin could "surprise on the upside" when it reports its profits on May 9.
NAB passed on 40 basis points of the 50 basis points in official interest rate cuts of late last year, and analysts say this should support earnings.
ANZ, which analysts think will report $3.13 billion in cash earnings on Tuesday, may also report pressure on margins in its Asian business, despite good conditions in Australia.
Westpac, which reports its profits on Friday, could also benefit from its home loan pricing strategy. Mr Wiblin noted that its loan book has the highest weighting of the big four towards mortgages, at 68 per cent.
Westpac also passed on only 38 basis points of the 50 basis points in official rate cuts of late last year, and analysts estimate its cash earnings will reach $3.38 billion.
While the failure to pass on official cuts in full is benefiting the banks, lenders say their costs are still under pressure because they are aggressively competing to attract deposits.
In the heated environment of an election year, whether these higher costs are outweighed by banks' mortgage pricing decisions is likely to be a sharp focus for investors and the public alike.
"The net interest margin of their consumer banks and the home loan books is one of the most important drivers of overall earnings for the banks, particularly for CBA and Westpac," Mr Ellis said. "They've always been, and will always, continue to be very carefully managed."