Bank revenue and earnings will fall in the 2023/24 financial year, with ANZ likely to suffer the biggest drop among the majors, Macquarie Securities has forecast in its latest sector outlook. Macquarie said that “as revenue and expense pressures persist”, revenues will fall by 1 to 3 per cent, pre-provision profits by 3 to 8 per cent and cash profits by 5 to 15 per cent. Costs will continue to rise because of inflationary pressure and investment requirements. On the revenue side, Macquarie said banks may have to rely more on higher-cost wholesale deposits, as household budgets are challenged and their ability to save reduced, which will contribute to a margin squeeze. At the same time, it expects consumers to continue moving their savings from cheaper at-call accounts to savings accounts and term deposits with higher rates. Macquarie said: “With rapidly rising rates in 2022/23, banks benefited from low-cost unhedged deposits. Rising rates and an upward sloping yield curve provided a material benefit to margins as deposit spreads widened. As the term structure of rates changes (given the market is now expecting cash rate cuts), we expect these benefits to unwind, resulting in margin headwinds.” It said banks will have to remain competitive on deposits as they complete the refinancing of the Term Funding Facility loans. On the lending side, competition for variable mortgages eased towards the end of last year but spreads remained low. The spread to cash is currently 1.8 per cent – down from 2.45 per cent in 2021.  “We expect mortgage margin pressure to remain a headwind in 2023/24. As customers refinance from low-margin fixed-rate mortgages written from 2020 to 2022 into new variable loans, banks’ mortgage margins should improve slightly. Banks have highlighted this as a minor tailwind in 2024, albeit not enough to offset other mortgage lending pressures.” It said banks will focus on managing origination costs and reducing churn to improve mortgage book profitability. Business lending is becoming more competitive and Macquarie said it expects the relatively high margins in this market to decline. Macquarie said banks will have limited scope to manage costs. “With legacy issues stemming from inadequate system investment, banks rely heavily on people and external providers. Wage pressures largely locked in through enterprise agreements and external provider costs will impact banks expenses. “Banks must carefully balance the need to reduce expenses and support profitability in a tougher revenue environment but continue investing.” Macquarie expects credit quality to deteriorate, despite low unemployment and wage increases, and move back towards long-term average impairment levels. It expects the biggest stresses to be in business books, with the biggest risk in commercial real estate, hospitality and retail trade. “While we expect impairments to normalise over the next few years, our forecasts hardly depict a large credit cycle,” Macquarie said. Macquarie’s forecast for ANZ is for net interest income to fall 3.4 per cent, operating expenses to rise 2.2 per cent, the bad debt charge to increase four-fold to more than A$1 billion and for cash profit to fall 15 per cent to around $6.3 billion. The forecast for Commonwealth