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Major banks face careful balancing act

Major banks face careful balancing act

KPMG analysis finds that the Australian major banks (‘the Majors’) have reported a decline in aggregate cash profits in FY2019.


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KPMG’s Major Australian Banks Year End Analysis Report 2018-19 finds that the Majors reported a combined cash profit after tax from continuing operations of $26.9 billion, down 7.8 percent on FY2018.

The Majors faced challenging economic and regulatory conditions in FY2019, including a soft local economy, continued investment and management attention on risk and compliance activities as well as intensifying levels of competition.

Ian Pollari, KPMG Australia’s Head of Banking commented: “A turning point for the Majors was the overall decrease in total operating income, driven by strong competition, particularly in mortgages, as well as a rebasing of fees following the Royal Commission.”

The fallout from the Royal Commission and the high volume of ongoing prudential, regulatory and parliamentary inquiries, together with litigation proceedings have impacted the Majors’ operating costs. There is a continued trend of re-allocating investment spend towards compliance, regulatory and customer remediation costs, forcing investment and resources away from enhancing technology and digitalisation priorities

“Management will face into the careful balancing act of fixing problems and re-building trust with customers, at the same time as creating capacity to invest in digital and technology capabilities in a lower growth cycle”, added Mr Pollari.

The ongoing effects of the Majors’ customer remediation programs continue to negatively impact financial results, which are routinely called out as ‘notable items’ within their cash profits.

Hessel Verbeek, KPMG Strategy Partner, Banking, said: “the Majors’ profits are down significantly as a result of shrinking margins in a low interest rate environment and higher costs, including refunds to customers, in the aftermath of the Royal Commission.”

Key highlights of the results are as follows:

  • Total operating income (cash basis) declined 3.7 percent to $81.3 billion, reflecting subdued lending conditions, the squeeze on margins and intense competition in mortgage markets. The Majors grew their mortgage books by a combined 1.8 percent in FY2019, below system growth of 3.1 percent, which resulted in their market share of the total mortgage market decreasing 92 basis points to 81.2 percent.
  • The Majors reported a cash profit after tax from continuing operations of $26.9 billion, down 7.8 percent on FY2018. This decrease is a consistent trend across each of the Majors and also reflects pressure on margins and increased remediation and regulatory costs.
  • The average net interest margin (cash basis) fell below 2 percent for the first time to 194 basis points, which represents a decline of 8 basis points on FY2018, largely driven by customers switching to cheaper home loans, customer refunds, competitive pricing pressures, costs associated with retaining existing customers and the impact of low interest rates. 
  • The average cost-to-income ratio has increased 210 basis points, to an average of 48.7 percent, reflecting the elevated cost associated with ‘investment’ in regulatory, risk and compliance programs. Whilst a large proportion of these costs have been labelled ‘large/notable items’ associated with customer remediation, there is debate as to whether there is a structural increase in the cost of doing business in the post-Hayne banking environment.
  • Credit quality has remained sound across the Majors, with a marginal increase of 1 basis point in impairment charges as a percentage of average gross loans and advances, to 14 basis points. Aggregated loan impairment expense has increased by 10 percent to $3.7 billion, off a historically low base. Asset quality measures have marginally deteriorated in lending portfolios, as impaired assets and delinquencies have increased in aggregate across the Majors.
  • The Majors have announced that they are well positioned to meet APRA’s “unquestionably strong” benchmark of Common Equity Tier 1 (CET1) ratio of 10.5 percent by the implementation date of 1 January 2020. The average CET1 capital ratio has increased 21 basis points to 10.79 percent, driven by capital management initiatives including divestment of non-core businesses, organic capital generation and dividend management. We highlight that WBC has also announced an additional $2.5 billion capital raising.
  • The focus on strengthening capital and challenging profitability has continued to impact return on equity (ROE), which decreased by 131 basis points to an average of 11.0 percent (including notable items). This trend may continue given the ongoing operational headwinds and the anticipated increase in the level of capital required to be held by the Majors’ New Zealand subsidiaries.

With the introduction of an Open Banking regime, scaled fintech companies entering from international markets and the launch of a number of new challenger banks, as well as the continued growth of international banks and non-bank players, the competitive landscape is set to benefit Australian consumers.

Looking ahead, the Australian banks will actively seek opportunities to invest in targeted areas of growth, enhance their customer-facing digital services and capabilities, as well as take greater action on reducing the cost of their operating models in order to position for the future.

For further information

Marjorie Johnston
KPMG Communications

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