Analysts are tipping bank earnings to fall despite strong revenue momentum from widening loan margins courtesy of the central bank’s interest rate cuts.

Analysis conducted by UBS, Credit Suisse, Citigroup and Bank of America - Merrill Lynch (BoA Merrill) showed Westpac is likely to be the standout bank when the sector reports its interim results next week.

The four brokers’ average estimate of Westpac’s cash earnings shows a 25.2 per cent jump to around $2.303 billion on a tripling in margins and significantly lower costs.

National Australia Bank’s (NAB) cash earnings are forecast to drop by 16 per cent to around $2.408 billion, while ANZ Banking Group’s cash earnings are expected to plunge 27.6 per cent to $1.21 billion.

Across the big four banks, including Commonwealth Bank, which reported in February, average cash earnings per share (EPS) are expected to fall by 8.4 per cent as bad debt provisions bite, UBS said in a client note on April 17.

Average first half EPS across the four brokers puts NAB’s at 111.45 cents, ANZ’s at 57.3 cents, and Westpac’s at 86.4 cents.

A cut to Westpac’s interim dividend by 13 per cent is also likely, BoA Merrill said.

This follows ANZ and NAB recently flagging 2009 dividend cuts of 25 per cent.

Strong revenue momentum is expected to be a hallmark of the upcoming earnings season as banks have boosted margins by re-pricing their loan and deposit books by not passing on the full amount of recent interest rate cuts.

UBS says wider margins, strong volume growth in loans and deposits and surging revenue growth from their markets division proprietary trading services have added an average 10 basis points to margins for the big four over the past six months.

Westpac turbo-charged its earnings courtesy of a tripling in margins to 19 basis points, while the repricing of ANZ’s corporate loan book has doubled its margins to seven basis points, UBS said.

Higher bad debts and commercial property impairment costs for NAB’s struggling UK subsidiaries are expected to be a heavy drag on its margins.

And ANZ’s revenue will suffer from big losses from its exposure to $US10.9 billion ($A16.86 billion) worth of credit intermediation trades with US monoline insurers.

All eyes would be on bad debt provisions and loan delinquencies as the bad debt cycle continues to dominate outlook statements because of the economic downturn, Goldman Sachs JBWere’s Matthew Ross said.

He said domestic investor sentiment towards the local bank sector may be dampened by any negative surprises on bad debts emerging from the US government’s stress tests on 19 Wall Street banks, due on May 4.

Bad debt charges are expected to rise to an average of 66 basis points to total loans as the bad debt cycle progresses from big name corporate failures to small-to medium-size enterprises.

But the big question is whether the banks’ previously flagged upgrades to bad debt provisions will continue to offset rising bad debts.

NAB and ANZ made provisions running north of $800 million to cover the first three to four months of 2008/09 and Westpac made first quarter provisions of $630 million, partially on exposures to Babcock and Brown, Allco Finance and ABC Learning Centres.

Loan delinquencies among consumers are expected to edge higher in line with rising unemployment, especially in New Zealand, which has been problematic for all banks and caused ANZ to flag a doubling in its full year 2009 provision to $NZ570 million.

And cost pressures will continue, with ANZ expected to have the highest cost-to-income ratio of the big four, at 50.7 per cent, as it pays for a recent corporate restructure, thousands of redundancies, an expansion into Asia, and legacy costs from its troubled Institutional division.

All four brokers expect Westpac to have the lowest cost-to-income ratio at between 37 and 39 per cent because of cost synergies from last year’s St George Bank merger.

AAP