The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has hit an 11-year high this morning and that's thanks in no small part to big bank stocks.
The Commonwealth Bank of Australia (ASX: CBA) share price, Westpac Banking Corp (ASX: WBC) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price are up around 1% each at the time of writing.
The rally in the sector is an extension of the strong run they've enjoyed over the past two weeks but Macquarie Group Ltd (ASX: MQG) is warning that the party could come to an end next month when the banks hand in their earnings report card.
Risk of disappointments
The broker warns that expectations may be set too high ahead of the reporting season, particularly when it comes to revenue trends.
"We expect a challenging 1H19 reporting season for the banks' sector. While banks have largely pre-announced their remediation charges (excl. ANZ), we expect underlying revenue trends to be weaker than expected," said Macquarie.
"Furthermore, while credit conditions remained generally supportive, given an uncertain economic outlook, we see downside risk to impairment charges. Our underlying forecasts remain below consensus and we see downside risk to expectations."
The broker is forecasting revenue growth of between -1% and 1% for the banks, excluding remediation and non-recurring charges.
The key headwinds are likely to come from soft non-interest income, margin pressure from front-to-back book mortgage rate normalisation, higher impairment charges and capital outlook due to the Reserve Bank of New Zealand's proposed change to capital buffers.
What to look for specifically
Looking at the individual banks that will report their interim results, investors should pay attention to further market share losses from ANZ Bank, its ability to manage costs and an update on customer remediation.
Meanwhile, investors should be watching for a potential dividend cut from NAB, its ability to maintain its superior credit growth momentum for its core business and its capital position.
Westpac is also at risk of announcing a dividend cut given its weak revenue outlook and a high FY19 forecast payout ratio of around 88%.
While bank stocks are looking cheap versus their historical valuation, I agree with Macquarie that it's too early to feel more bullish on the sector given the tough operating environment.
However, I stand ready to lift my under-weight position in the sector (Macquarie is the only stock I am overweight in for the sector) if these stocks are sold off for failing to meet expectations, assuming I see more encouraging signs that the housing downturn is not worsening.
