The Westpac Banking Corp (ASX: WBC) share price has been on a decent run over the last few weeks. With a lot of businesses reporting in August, including a few ASX bank shares, it could be an interesting time for one of the biggest lenders in the country.
There has been a lot of talk about how much profit banks might be able to generate in this competitive environment where interest rates are now much higher than before.
Investment outfit Martin Currie has done some analysis on the banking sector and made some commentary about how things are looking.
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Margins to struggle?
Chief investment officer Reece Birtles and portfolio manager Matthew Davison said that its analysis indicates that as funding costs normalise to "pre-low rate era levels", the large mortgage discounts that all banks have offered customers "will come home to boost".
The Martin Currie fund managers said that deposit margins are now a headwind, so the only way for ASX bank shares to repair their net interest margins (NIMs) will be to limit the pass-on benefits to customers when the rate-cutting cycle starts.
If higher-than-desired inflation sticks around, Birtles and Davison suggested that it could take a while for banks to implement that strategy, which increases the risk of "lower NIMs persisting".
The fund managers believe that lower NIMs will lead to reduced revenues, which they suggest will be "even lower than the consensus estimates for the next three to five years."
Lower revenue will then mean that cash earnings aren't as good as Martin Currie was initially expecting, and what the consensus of market analysts thinks.
All of that doesn't sound good for the Westpac share price, considering profit is a key factor for valuations.
Reduced credit demand
While the margin may be troubled, the fund managers suggested that after the huge level of household savings during the COVID-19 years, savings rates have "normalised", and people are "increasingly using their savings to cover their growing mortgage and essential living costs."
Rising interest payments "pose risks" broadly to household consumption expenditure and may limit household demand for more debt.
Caution about house prices
The Martin Currie investment managers suggested that the current conditions have "set the backdrop for a potentially sharp correction in the supply of credit for housing."
They suggested that there are risks for people accessing and servicing debt to purchase property, which could mean a "substantial decline" in credit availability "translating to lower prices."
The fund managers noted that a lack of housing stock and immigration has supported prices recently, but the ongoing higher inflation and easing loan approvals "all point to the potential for a deeper correction in house prices, further contributing to the revenue squeeze for banks."
Westpac share price valuation
Using the forecasts on Commsec, Westpac shares are valued at under 11 times FY23's estimated earnings, which may be cheap, but the fund manager outfit Martin Currie is seemingly not a fan.
