Australia banks suffering rising margin pressure

Also subdued demand for credit.

In a wrap-up regarding the August 2014 mini reporting season, benefits of being overweight retail banking in the current environment was highlighted.

According to a research note from Nomura, all banks faced increasing margin pressure as well as subdued demand for credit in their business portfolios, while retail banking results appear solid (from CBA’s disclosure)

Also, the subdued level of volatility had a negative impact on the banks’ markets income, placing further pressure on Institutional division results.

Here's more from Nomura:

Balance sheet trends were generally favourable across the sector with the level of problem loans continuing to decline and capital levels improving further.

We expect all majors to comfortably meet 9% core Tier 1 ratios (after deductions of WM-related debt) by the end of FY15.

However, the majors continued to see further reductions in collective provision balances which continue to boost profitability.

Overall, these trends continue to favour retail banking in Australia. Although we don’t believe these trends are going to last indefinitely, and we expect the performance of business-leveraged divisions to improve, in the short term it appears that retail banking is still the place to be.

We continue to favour Westpac Banking Corp (WBC AU, Buy) for this thematic and see CBA as fully valued at current levels.

Looking at the CBA 1H14 result, divisional performances were generally weak. Retail Banking showed the strongest growth (h-h) at the pre-provision profit level, and NZ was the only other division to record positive growth.

Capital positions improving. The majors have all maintained strong capital positions, with their core Tier 1 ratios at 8.1-8.8% (proforma basis).

On our estimates, WBC would have the strongest core Tier 1 ratio, adjusting for the impact of the deduction for WM debt.

Nevertheless, we expect all of the majors to comfortably meet 9% core Tier 1 ratios (after deductions of WM-related debt) by the end of FY15.

Credit quality remains a positive contributor. Credit quality trends remained favourable across the sector, with the level of problem loans continuing to decline.

However, the majors continued to see further reductions in collective provision balances which continue to boost profitability.