Next week sees bank reporting season for the 2016 half year. This begins on Monday 2nd May with Westpac, followed by the ANZ, NAB & Macquarie Group (reporting on the 3rd, 5th and 6th May respectively). Broadly speaking, the market is still expecting positive cash earnings and net profit after tax (NPAT) growth this reporting season. Net Interest Margins (NIM) are expected to relatively flat at best and may end up being a few basis points lower for some. While higher short term funding cost increases have been offset by the banks passing on these increased costs to both housing and business borrowers, competition from both regional and non-bank lenders are expected to remain. Continued scrutiny of the banks by both the regulators and their political masters may also impact profitability going forward. The market remains concerned that the banks have reached a low point in loan impairments, and have been bracing for an increase in provisions as a result. Weaker energy and commodity prices over 2015 have caused bad and doubtful debts to rise. Any sustained weakness in residential, commercial and office property markets over 2016 will compound those concerns. Loan growth continues, although some banks will need to watch where that growth comes from. APRA’s macro-prudential 10% limit on investor loans have had an impact. Some of this slack has been taken up by owner-occupiers and, to a lesser extent, by first home buyers. Affordability remains low as house prices are high relative to household disposable incomes. Wage growth remains flat while living expenses continue to rise. Lower petrol prices have helped, but have started to rise. The irony regarding loan growth is that this needs to be supported by the generation of capital. While APRA announced last year that the capital required for the four major banks to hold against Australian residential mortgages increased to 25% (from 16%), the Financial Services Inquiry was calling for a 25% to 30% risk weighting. More recently, the global banking regulators appear to be toughening their stance on requiring banks to hold even more capital to guard against bank failures although the implementation date for the next round of Basel accords may not eventuate until 2018/19. The divestment of non-core business units, especially if capital intensive in nature, is expected to continue and will aid in generating capital and reducing costs from both a bottom line and compliance perspective. Westpac Bank – Half year results expected to be steady although management did highlight single-name credit exposures as a risk during March. The Westpac Trust Preferred Securities (ASX code: WCTPA) have an expected maturity date of 30 June 2016 so a replacement issue is expected soon. ANZ Banking Group – Half year results expectations were lowered due to the recent increase in impairment guidance. Potential asset sales still being worked upon and may provide further upside in capital release. Regulatory concerns resulting from the bank bill swap rate (BBSW) case brought by ASIC and industry wide investigations into the life insurance business will be a distraction for management. Resources sector and Asian business exposures still a concern. Strategy regarding increased market share in the Australian residential mortgage market as house prices begin to taper off bears watching. Further clarification of Australian wealth strategy may also be forthcoming. National Australia Bank – Expected to benefit from a simpler and more focused business model as the 2016 half year results will be the first reporting period post the Clydesdale Bank demerger. The CET1 capital ratio is expected to be lower post the demerger and middle of the pack, rather than be a leader. Investor mortgage loan growth has been above the 10% growth threshold enforced by APRA and will to be pulled back as a result. UBank lending growth and margins will be interesting (if available) as they have been aggressive in growing market share in this segment. Macquarie Group – Recently reiterated 2016 guidance but remains susceptible to market conditions and FX movements. Annuity-style business units are expected to provide some stability. The group will face increased competition to win the right to control the Port of Melbourne business over the next 50 years (up to 2066).