Major banks navigating to a new reality: KPMG Major Australian Banks Half Year Analysis 2020
KPMG analysis finds that the Australian major banks (‘the Majors’) have reported a decline in aggregate cash profits for the first half of 2020.
KPMG’s Major Australian Banks Half Year Analysis Report 2020 finds that the Majors reported a combined cash profit after tax from continuing operations of $8.3 billion, down 42.6 percent on the same period in FY2019.
The Australian economy faces an unprecedented level of uncertainty surrounding the size and duration of the financial downturn resulting from the COVID-19 pandemic.
FY2020 will be a year where the Majors will play a critical role supporting the economy to withstand the impact of the crisis and to help in its recovery. Furthermore, it is an important opportunity for the industry to rebuild community trust and purpose, much of which was lost during the Royal Commission.
Against this backdrop, the Majors have recorded a fall in profitability, as revenue and margin pressures continue, with elevated cost bases and deteriorating asset quality impacting negatively on industry returns.
Ian Pollari, KPMG Australia’s Head of Banking commented: “The biggest challenge for the Majors will be balancing the necessary support for the recovery effort and in doing so, restoring their reputations, whilst at the same time navigating a number of structural headwinds.”
While the Majors face these exceptional circumstances in a relatively strong position – from a liquidity, funding and capital perspective compared to the Global Financial Crisis – it is clear that the effects of this crisis will be long-term and profound in terms of impact.
“The Majors have the opportunity to use COVID-19 as a catalyst to accelerate their digital transformation, simplification and operational resilience efforts”, added Mr Pollari.
Hessel Verbeek, KPMG Strategy Partner, Banking, said: “While the Majors have proven resilient so far, it is too early to estimate the full impact of the COVID-19 crisis on their 2020 performance.”
“The Majors will have to contend with the demands of customers who want relief from loan repayments, a government which wants credit made available, a regulator which wants unquestionably strong balance sheets and shareholders who want strong profits and dividend payouts”, Mr Verbeek added.
Key highlights of the results are as follows:
- Total operating income (cash basis) declined 3 percent to $39.9 billion, reflecting subdued lending conditions and continued squeeze on margins. The Majors grew their mortgage books by a combined 2.7 percent in HY2020, with non-housing lending growing by 5.2 percent.
- The Majors reported a cash profit after tax from continuing operations of $8.3 billion, down 42.6 percent compared to the first half of 2019. This decrease is a consistent trend across each of the Majors and also reflects pressure on margins and increased remediation and regulatory costs.
- Cost-to-income ratios have increased from an average of 46.1 percent to 54.8 percent, reflecting the elevated costs associated with large and ongoing customer remediation and regulatory programs, in particular related to the management of non-financial risks (operational risk, conduct and compliance), as well as a large amortisation increase by one of the Majors.
- Credit quality has been negatively impacted by the early onset of the crisis leading to an increase of 29.5 basis points in impairment charges as a percentage of gross loans and advances. Aggregated loan impairment expense has increased by 226 percent to $5.7 billion. This reflected both the impact of COVID-19, as well as a broader credit deterioration.
- The average Common Equity Tier 1 (CET1) capital ratio increased 14 basis points to 10.9 percent, driven by capital management initiatives including divestment of non-core businesses, organic capital generation and dividend management. We highlight that NAB has also announced an additional $3 billion capital raising.
- The major banks recorded an average net interest margin of 193 basis points (cash basis), down 3 basis point compared to the first half of 2019, largely driven by switching from higher margin interest-only loans to principal and interest and competitive pricing pressures.
- Rising bad and doubtful debts, increasing capital and subdued growth sees return on equity (ROE) continue to fall, decreasing by 557 basis points to an average of 6.4 percent. Downward pressure on ROEs will remain for the foreseeable future, given the ongoing impact of a deteriorating global and local economy.
Looking forward, COVID-19 will undoubtedly have an adverse impact on revenue performance (fee waivers), loan growth (soft underlying growth partially offset by drawdowns by corporates) and asset quality in FY2020 and beyond. However, the banks that recognise the new reality and take bold, proactive measures to preserve positive changes made during the crisis and that use it to re-set their operating models and ways of working, will come out of it more quickly and be in a stronger position to capitalise on future opportunities.
The full report is available on the KPMG website
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