ASX bank shares best placed to ride the $1bn+ provisioning profit boost this reporting season

Expectations are building ahead of the ASX bank reporting season and experts are predicting that the sector will get a $1 billion plus earnings injection on top of operating profit growth.

| More on:
ASX bank profit upgrade Red rocket and arrow boosting up a share price chart

Image source: Getty Images

Expectations are building ahead of the ASX bank reporting season and experts are predicting that the sector will get a $1 billion plus earnings injection on top of operating profit growth.

The extra profit boost comes courtesy of the great COVID-19 unwind. While ASX bank shares had to cut profits to build a cash buffer during the pandemic, they are expected to return a chunk of this back to their bottom lines now.

This places the ASX bank shares in a good position to report higher profits and dividends over the coming few reporting seasons.

ASX banks getting a free ~$1.6 billion profit kick

The extra cash buffer, called provisions, was meant to protect banks’ balance sheet from a potential wave of loan delinquencies.

This never materialised during the COVID outbreak thanks to massive government and central bank support.

While most of us know this, the analysts at Macquarie Group Ltd (ASX: MQG) believes the market is underestimating the upside.

The broker is forecasting around a $1.1 billion to $1.6 billion release in provisions for ASX banks.

ASX banks still on an earnings upgrade cycle

“Only a year ago, we were examining the extent of potential credit losses, and now the focus has shifted to how low bad debts are likely to go,” said Macquarie.

“With very little stress in the system, courtesy of highly accommodating policies and support measures, we continue to see upside risk to consensus expectations from a further reduction in BDD [bad and doubtful debt] charges.”

The strong housing market and robust rebound in the Australian economy means that provisions can stay lower for longer. That puts extra money in banks’ pockets, which can be used to pay dividends.

The ASX banks best placed to benefit

We may be entering a period where loan losses will track below the average in any given cycle thanks to the upswing.

In this regard, Macquarie is forecasting ASX banks to report credit charges of just 10 to 13 basis points a year for the next three years. In contrast, the five-year average is around 11 to 21 basis points.

This means further ASX bank profit upgrades could be on the cards.

However, some ASX banks will benefit more than others. The broker noted underlying loan losses relative to the mid-cycle are lower in recent years for National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) than for Australia and New Zealand Banking GrpLtd (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA).

Upgrade cycle coming to an end?

Macquarie has upgraded its earnings forecast for ASX banks by between 1% and 5%. It doesn’t sound much, but the broker has already upgraded the sector four other times this year alone.

The total earnings upgrade runs to around 15% to 25% and there could be more consensus upgrades coming.

The only thing is we are probably at the tail end of the ASX bank profit upgrade cycle, noted Macquarie.

While the easy money has been made, it’s still too early to be trying to pick ASX banks’ share price peak – not when the tailwinds are still blowing strong.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Bank Shares

A woman wearing yellow smiles and drinks coffee while on laptop.
Bank Shares

CBA share price higher on customer experience update

CBA is building new and innovative customer experiences...

Read more »

A middle-aged woman sits in contemplation over a tablet device considering information about ASX shares and deep in thought.
Bank Shares

Is the NAB share price cheap with its recent pullback?

Here's the verdict according to analysts.

Read more »

An ASX shares broker analysing a chart tracking the A2 Milk share price
Bank Shares

Here’s why the CBA share price could soon be in for some pain

Is it buy or sell for CBA shares today?

Read more »

A woman looks shocked as she drinks a coffee while reading paper.
Dividend Investing

Hoping to bag the next Westpac dividend? Read this

Westpac shares will be one to watch out for over the coming days...

Read more »

A man in business pants, a shirt and a tie lies in the shallows of a beautiful beach as he consults his laptop on the shore, just out of the water's reach.
Dividend Investing

How does the Bank of Queensland dividend compare to the other ASX 200 banks?

We dive into how the Bank of Queensland dividend ranks against the big banks.

Read more »

Group of thoughtful business people with eyeglasses reading documents in the office.
Bank Shares

How has the Bank of Queensland share price travelled since the company’s half-year results?

Are Bank of Queensland shares in sync with the company's financial performance? Let's take a look.

Read more »

Gold piggy bank on top of Australian notes.
Dividend Investing

How does the ANZ dividend compare to the other ASX 200 banks?

ANZ is expected to pay a large dividend in FY22. How big will it be?

Read more »

A businessman keeps calm in the face of inflation
Economy

Inflation to ‘peak shortly’: CBA boss says markets have priced in too many rate rises

The big bank forecasts fewer rate hikes from the RBA than consensus expectations.

Read more »