Cash rate cut to drag down NIM, earnings and ROE

UBS has forecast that the major banks will suffer an eight basis point fall in net interest margin as a result of last week's cash rate cut and the one its expects in April. Earnings for the Big Four will fall by as much as 4 per cent in the 2020/21 financial year.

In a note on the impact of the rate cut, UBS banking analyst Jonathan Mott said that although deposit rates would also be reduced, these would be insufficient to offset NIM pressure.

"Our downgrades are modest, as we had already incorporated a 25 bps cut into our forecasts and assumed a pick-up in credit growth to partially offset the NIM pressure," Mott said.

UBS expects the rate cuts to further stimulate the housing market, which is once again showing signs of exuberance in Sydney and Melbourne. It expects housing credit growth of 4 per cent (the current rate is 3.1 percent).

Offsetting this growth, it expects the major banks to lose market share.

"With many deposit products approaching zero and with three-year bonds falling below 45 bps, reducing the yields on banks' hedges, we expect bank NIMs and ROE to come under pressure in the current financial year and beyond."

UBS is also expecting an increase in credit impairments.

UBS has revised its forecast for ANZ's 2020/21 cash net profit from A$5.9 billion to $5.7 billion - a reduction of 4 per cent.

It has cut its forecast for Commonwealth Bank's 2020/21 earnings by 2.8 percent to $7.9 billion; its forecast for NAB's 2020/21 earnings by 2.5 per cent to $5.5 per cent; and its forecast for Westpac's 2020/21 earnings by 2.8 per cent to $6.4 billion.

"With rates likely to remain near zero for the foreseeable future, sector ROE is likely to fall towards single digit levels, placing further pressure on capital generation and dividends.

"NIM declines may force the banks to further review their dividend policies."

UBS rates ANZ 'neutral', CBA a 'sell', NAB a 'sell' and Westpac 'neutral'.

Mott said the banks were likely to look to increase productivity gains given the weaker revenue environment.

"But we believe that achieving cost reduction may be challenging. The banks still face substantial cost pressure from higher risk and compliance spend."