Australia's big banks have raked in nearly $30 billion in 2022, but they are facing a tougher 2023, as some borrowers struggle with higher mortgage repayments as interest rates soar.
In 2022, Australians took advantage of record low interest rates to buy the Australian dream, which helped banks post bumper profits.
The combined cash profit for the country's biggest banks rose 6 per cent to $28.5 billion dollars, the best result since 2018 according to accounting firm PWC.
That is even though the banks' net interest margin - the amount it charges for borrowing compared to what it pays for finance - fell to a record low of 1.77 per cent because of tough competition for home loans.
PWC Banking Leader Sam Garland said the major banks made it through the pandemic as they wrote more loans, reduced expenses, and simplified their businesses.
"About 7 per cent lending growth which actually offset a decline in margins for the whole year," he said.
"The second big driver was notable expenses including remediation, those were down $1 billion for the year."
The banks are also making more money by charging customers higher interest rates as the Reserve Bank raises official borrowing costs to curb inflation.
Australians with variable home loans from the Commonwealth Bank, National Australia Bank, and ANZ, saw their interest rates rise a further 0.25 percentage points on Friday as the RBA's latest rate rise takes effect.
But as rates continue to increase, banks are on the watch for a rise in bad loans and defaults, especially if much of the world, and even Australia, enters a recession.
UBS Head of Banking Research John Storey thinks the banks will stay profitable even though the Australian economy is expected to slow down dramatically next year.
"There is a number of challenges facing the banks."
"Clearly interest rates going up is going to put pressure on consumers," he said.
"The banks are well capitalised going into what is going to be a tougher economic environment, but they've got the earnings power to actually absorb some of these higher losses or expected losses."
'Fixed rate mortgage cliff'
This includes some first home buyers and households with fewer savings and high debt.
John Storey said the borrowers most at risk of defaulting on their mortgages are those who got in at the height of the market, when home prices were at a record high.
"It's probably clients that have taken out loans, I would argue over the last six months, last 12 months, where interest rates were at their trough, and arguably property prices were at their peak."
Sam Garland said borrowers on fixed rate mortgages are among those at risk of losing their homes.
"It's being described as the fixed rate mortgage cliff that occurs in 23 and 24 because for alot of borrowers that's going to mean moving from a rate of say 2 per cent to well over 4 per cent on their mortgage," he said.
"There's no question that's going to be a big adjustment for a number of customers."
But the National Australia Bank chief executive Ross McEwan told the Business this week that he was not panicking, even as customers on fixed rate mortgages see rates surge from around 2 per cent to 5 or 6 per cent or even higher.
"The customers we think are the most vulnerable are the ones that are seeing increases even beyond say a 3 per cent above what they had, and that's the group that we've been looking at, and seeing what's the behaviour going on. Are they still able to pay?"
Mr McEwan said around $1 billion to $10 billion worth of the bank's $320 billion loan book would be at risk if the cash rate hit 3.6 per cent.
About one third of NAB borrowers on fixed rate loans will see their terms roll over by September next year, and the rest the following two years.
RBA big stick
The RBA raised interest rates from a record low in May to 2.85 per cent to curb the highest inflation in three decades.
It slowed down the pace of rate increases earlier this month by delivering a 0.25 percentage point increase, instead of a 0.5 percentage point hike to because it is worried about risks to the global and domestic economies.
"We've made some really big gains in terms of employment in the Australian economy," she told a business function this week.
"We could crunch the economy very hard and bring inflation down very quickly but we would very likely lose those gains."
That is not all that would be lost if Australia enters a recession.
