New KPMG research finds that the Australian major banks (‘the majors’) have reported a decrease in aggregate cash profits for the 2018 full year, as they restructure and simplify their business models in order to regain trust and position for a more challenging operating environment.
KPMG’s Major Australian Banks Full Year Analysis Report 2017-18 finds that the majors reported a cash profit after tax from continuing operations of $29.5 billion for the 2018 full year, down 5.5 percent (compared to 2017).
The result underscores a challenging regulatory and operating environment for the majors. They face slowing revenue growth, rising capital levels and increasing legal and remediation costs – at the same time as the industry works to rebuild trust with stakeholders.
Ian Pollari, KPMG Australia’s Head of Banking commented: “In the face of a number of structural factors impacting the banking industry simultaneously, the majors are executing against their restructuring and simplifications programs in order to reposition their business models for the future.”
“They are adapting their business mix, product portfolios and distribution strategies in response to the evolving operating and regulatory environment,” Mr Pollari added.
While remediation, legal and regulatory costs have risen substantially as a proportion of the major’s total expenditure, the banks will need to balance this spend with continued investment in digital and technology innovation in the face of growing threats from new players. This is especially relevant given the introduction of changes to the ADI licensing regime and Open Banking, which are intended to stimulate greater competition in the market.
Hessel Verbeek, KPMG Partner, Banking Strategy, said: “Not only have the various compliance and remediation costs translated into higher cost-to-income ratios, the majors’ investment spend in risk and compliance projects is also up strongly and in most cases investments on growth initiatives has decreased in a relative sense.”
“If this redirection of investment towards regulatory compliance continues over a protracted period of time and the majors are unable to maintain their historical levels of investment in digital and other competitive initiatives, it could impact on the level of innovation that Australian consumers and businesses are accustomed to from our banking industry. Trade-offs will inevitably need to be made,” Mr Verbeek added.
Key highlights of the results are as follows:
The majors reported a cash profit after tax from continuing operations of $29.5 billion for the full year, down 5.5 percent (compared to 2017), driven by lower non-interest income and higher restructuring and regulatory costs.
The major banks recorded an average net interest margin of 200 basis points (cash basis), down 1 basis point compared to 2017, primarily due to mortgage and deposit re-pricing offsetting lower earnings on capital, market’s income and the impact of the Major Bank Levy.
The majors recorded net interest income growth (cash basis), increasing by 2.2 percent to $62.7 billion for the full year; while non-interest income (cash basis) decreased by 3.7 percent to $22.4 billion, due to asset disposals, the removal of certain fees (e.g. ATMs), customer redress and other regulatory changes (e.g. inter-change fees). Housing credit recorded credit growth in the full year of 3.3 percent, compared to non-housing credit which grew by 2.9 percent.
The major banks’ aggregate charge for bad and doubtful debts decreased by $702 million to $3.3 billion (statutory basis) for the full year (down 17.7 percent on 2017), with lower individual credit impairment charges, partly offset by an increase in collective provisions for some of the major banks.
The majors’ capital position continued to rise, with their average Common Equity Tier 1 (CET1) capital ratio rising by 25 basis points over the full year to an average of 10.6 percent of risk-weighted assets (RWAs), reflecting the impact of increased regulatory capital requirements.
Slowing revenue growth, rising operating expenses and regulatory capital requirements continue to compress industry returns. The majors’ returns on equity (ROE) decreased by 134 basis points to an average ROE of 12.5 percent for the full year.
The average cost-to-income ratio increased by 356 basis points across the majors to 46.6 percent, attributed to meeting rising regulatory compliance, legal and remediation requirements, as well as restructuring.
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