KPMG analysis finds that the Australian major banks (‘the Majors’) have reported a significant decline in financial performance for the full financial year 2020.
KPMG’s Major Australian Banks Full Year Analysis Report 2020 finds that the Majors reported a combined cash profit after tax from continuing operations of $17.4 billion, down 36.6 percent on FY2019.
As the impact of the COVID-19 pandemic continues to evolve, the Majors have maintained a strong focus on supporting their staff and customers, as they demonstrated resilient operations and continued lending.
While they have significantly increased their loan loss provisions and allowed customers to defer loan repayments, to date their actual loss experience has been minimal. The open question is to what extent loan losses will materialise in 2021, as the Commonwealth Government unwinds its economic support measures.
FY2020 has also been the year when interest margins have continued their downward trajectory (in a record low interest rate environment), costs have remained stubbornly high and significant extraordinary items (customer remediation and regulatory charges) heavily influenced the full year results.
Ian Pollari, KPMG Australia’s Head of Banking commented: “Despite the substantial challenges, the Majors have proven resilient in the last year and through the strength of their balance sheets, played a critical role as shock absorbers for the economic downturn.”
As the focus shifts to recovery, the Majors will need tread carefully in extending liquidity or deferral measures to customers and remain vigilant in assessing the solvency of borrowers.
Pollari added: “They have a big job ahead of them to play their role in Australia’s recovery and improve their financial performance, while progressing with a number of large and complex remediation, regulatory change and technology programs.”
In the face of more customers migrating to digital channels and the significant cost opportunity in automating processes, the Majors will need to create financial and operational capacity to invest in the digitisation of their operations.
“The cost transformation challenge for the Majors requires them to accelerate the digitisation and automation of end-to-end processes, notwithstanding the persistently high levels of risk and compliance spend, “said Pollari.
Hessel Verbeek, KPMG’s Banking Strategy Lead, said: “As the global and local banking industry enters a period of economic and digital disruption, the Majors remain focused on supporting customers, protecting their balance sheets and investing in the future.”
“Whilst their profitability has fallen considerably in the past year, in part due to notable items, their returns continue to be above that of many global peers.”
The Majors face strong competition from focused challengers, in payments, mortgages, consumer credit, business lending and merchant acquiring that appeal to an increasing number of customers. Many of these competitors offer digital channels and products, supported by efficient processes.
Verbeek added: “The Majors are increasingly turning to fintech partnerships to digitise processes, launch new products and build new business models. This leapfrog approach can overcome many of the transformation challenges posed by their legacy systems and environments.”
For FY2021, important performance indicators to watch include loan loss performance as Government support unwinds, credit growth (especially in mortgages and business lending), the rate of interest margin decline and cost-income ratios.
The Majors will need to continue to balance between operational resilience, shareholders looking for dividends, the required investment in growth, and cost transformation. The banks that manage to quickly transition to more efficient operating models and are able to execute at scale will be rewarded.
The full report will be released on the website later today.
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