KPMG analysis finds that the Australian major banks (‘the majors’) have reported a continued decline in aggregate cash profits for the first half of 2019.
KPMG’s Major Australian Banks Half Year Analysis Report 2018-19 finds that the majors reported a combined 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).
The majors 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 drag on performance, as the majors seek to rebuild trust with customers post the Royal Commission.
Ian Pollari, KPMG Australia’s Head of Banking commented: “Falling housing demand, tightening credit standards and greater competition, in particular from the non-bank sector, have combined to constrain the major’s revenue performance in retail banking.”
“As the headwinds show no signs of abating, the majors will need to carefully balance their revenue, capital management and cost objectives to preserve industry returns, at the same time as they execute on large, complex regulatory change programs to restore trust in the sector,” Mr Pollari added.
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.
Hessel Verbeek, KPMG Partner, Banking Strategy, said: “As the majors deal with risk and compliance challenges, they will continue to focus their efforts on simplification as they seek to drive greater efficiency in their core franchises to manage their financial performance.”
Key highlights of the results are as follows:
- 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). The deterioration in cash profits was 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 point 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 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 10.8 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 have 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%, up 79 basis points from 1H18.
The full report will be available on the KPMG website later today.
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Ashford Pritchard 0411 020 680