Australian major banks have reported a continued decline in aggregate cash profits for the first half of 2019, as they face challenging conditions from slowing lending growth and margin compression, at the same time as delinquencies rise in a softer domestic economy. In addition, remediation costs are a major contributor of performance, as the banks seek to rebuild trust with customers post the Royal Commission.

The majors have continued to allocate a greater proportion of their spending towards risk and compliance, rising substantially to comprise almost 40 percent of the majors’ total investment expenditure for the first half of 2019. Faced with growing competition from non-bank lenders and new entrants, the majors will need to balance this investment profile with digitalisation and innovation to maintain market share and deliver an enhanced customer experience.

• The majors reported a cash profit after tax from continuing operations of $14.5 billion for the first half of 2019, down 4.0 percent (compared to first half of 2018), driven by lower net interest and non-interest income in a challenging operating environment, margin pressure, and rising regulatory and customer-related remediation costs.
• The major banks recorded an average net interest margin of 195 basis points (cash basis), down 11 basis points compared to the first half of 2018, largely driven by customers switching from higher margin interest-only home loans to principal and interest, and increased short-term wholesale funding costs.
• The majors recorded a decline in net interest income (cash basis) of 1.6 percent from the first half of 2018 to $31.6 billion and non-interest income (cash basis) decreased by 11.1 percent compared to the first half to $9.6 billion, due to customer remediation (reversal of revenue) and lower fee income. Housing credit recorded an increase of 1.5 percent in the half, with non-housing credit growing a modest 1.3 percent.
• The average cost-to-income ratio increased by 47 basis points across the majors from the first half of 2018 to 46.1 percent, attributed to higher customer remediation costs and lower revenue in the first half of 2019, partly offset by the non-recurrence of some one-off items in the prior comparative period.
• The major banks’ aggregate charge for bad and doubtful debts decreased by $23 million to $1.8 billion (statutory basis) for the first half of 2019 (down 1.3 percent on first half of 2018), with lower collective provisions for some of the major banks, partly offset by higher individual credit impairment charges.
• The majors continued to increase their capital position, with an increase of 25 basis points over the half year in their average Common Equity Tier 1 (CET1) capital ratio to an average of 10.9 percent of risk-weighted assets (RWAs), reflecting the continued focus in meeting increased regulatory capital requirements. At the same time, maintaining the level of dividends has proved challenging during the half.
• With lower revenue, rising regulatory costs and ongoing customer remediation, the majors’ return on equity (ROE) has decreased 88 basis points from the first half of 2018 to an average ROE of 12.0 percent, with average dividend payout ratios increasing to 78.4 percent, up 79 basis points from 1H18.

Download the Major Australian Banks: Half Year 2019 Results Snapshot (PDF 81KB)

Read our media release – Major banks confront challenging conditions in half year analysis