Posted: 05 May 2019 3 min. read

Efficiency - 1H-19 Major Bank Results

Given the subdued revenue growth and the challenging operating outlook, the majors have had to focus on efficiency.

Major Banks - 1H 2019 results - Efficiency

Underlying cost to income ratios (excluding large notable items) have improved for all banks (except WBC) compared with both the corresponding and most recent half year period.  CBA’s underlying costs rose slightly, however income grew faster.  Both NAB and ANZ saw overall reductions in underlying operating expenses compared to prior half year periods. WBC’s cost to income ratio was up to 43.7% excluding the effect of large notable items, mostly due to lower total income.

ANZ’s total full time equivalent (FTE) employee numbers decreased slightly, however personnel expenses remained flat.  Technology expenses were down 30%, mostly due to lower amortisation after a large accelerated amortisation charge in the most recent half.  Other expenses declined due to lower marketing and consulting spend.

CBA’s personnel and technology expenses rose slightly compared with the prior corresponding half, offset by reductions in occupancy and other expenses.  CBA’s FTE numbers were up 3% versus 1H-18, but flat compared to the most recent half.

NAB’s underlying costs have increased by 1.7% compared with the corresponding half, with increased investment in technology, compliance and control costs, offset by reductions in personnel and occupancy expenses.  Total expenses reduced 2% compared to the 2nd half last year through better cost control.  NAB’s FTE numbers were largely flat.

WBC’s total operating expenses increased 7% compared with March 2018.  Excluding notable items, the increase was lower at 2%.  Underlying staff expenses decreased slightly due to a 3% decrease in FTEs.  At the same time occupancy expenses increased slightly and technology expenses were also marginally higher.  The bank noted some productivity gains from branch closures and property consolidation.   

Removing costs is much harder than adding them. However, as part of their efficiency drive and the simplification agenda, the banks have focused on reducing their absolute cost base. Collectively the major banks’ total operating expenses were down to $18.87bn, representing a 2.6% decrease compared with March 2018, and 4.3% compared with September 2018

Large notable items and discontinued operations

Included in CBA’s half year result were net losses of around $400m from large notable expenses, including expenses for risk and compliance uplifts, and customer remediation.

ANZ recorded a net $86m profit from large notable items, with gains on sale from divestments of $201m offset by Royal Commission ($79m post tax) and restructuring costs.  A further $53m (post tax) of customer remediation costs related to discontinued operations (the sale of the OnePath businesses to IOOF and Zurich).

NAB recorded losses from discontinued operations of $200m for customer related remediation associated with the life insurance business sale to Nippon life, with the remaining $325m (post tax) relating to customer remediation in the wealth, financial planning and banking business as part of continuing operations.

The WBC result was significantly affected by notable items in the half year.  Customer remediation costs negatively impacted profit by $617m (post tax), whereas costs relating to restructuring the wealth business hurt results by a further $136m.

The current cost and resource squeeze however, is taking place in the context of the considerable work Australian banks have done on efficiency over the last two decades. The majors have successfully delivered positive jaws – the gap between income growth and cost growth – over the last decade. As a result their cost-to-income ratios sit at around 42 to 49%, significantly lower than their American and European peers (60-63%)[i] .  Nevertheless, there are opportunities to trim the absolute cost base further to deliver sustainable long term returns

1H 19 Operating expenses

Remediation costs

The remediation spend and the related timeframes are one of the major headwinds to the banks results.  The majors have announced (expensed and provisions) approximately $5.6bn for customer refunds and remediation since 2017.

Although difficult to estimate, this cost is likely to increase substantially. Further provisions were set aside this half for costs arising from past misconduct, possible breaches of responsible lending laws and misselling banking and insurance products, in the face of ASIC’s ‘why not litigate?’ mantra and APRA’s new enforcement approach.

In an era of low revenue growth, banks will need to continue to simplify their business models, drive out inefficiency and optimise the cost to serve or sell to customers. They will continue to focus on productivity and dedicated ‘cost-out’ programs, combined with transformative technologies such as AI, RPA and large-scale automation.

In addition, banks are reducing management layers, the number of products and IT applications, and eliminating redundant processes as they re-focus on the ‘core’.

Key questions

Questions COOs, CIOs, CFOs and business units should be asking include:

1.   Are we harnessing the transformational power of digital technologies to streamline our cost structures?

2.  Can we increase cross-business unit and cross-enterprise collaboration?

3.  Can we increase business agility and flexibility?

4.  Do we have the right skills and capability to deliver our strategy?

5.  Can we improve our training processes to emphasise customer experience and culture?

6.  Can we further rationalise our IT application portfolio?

7.  Can we improve our processes for managing systems operation, maintenance & change?

8.  Can we consolidate or rearchitect data stores?

9.  Can we improve IT performance management methods and tools?

10.  Can we establish product, service and process innovation as core competencies?

11.  Are there options to buy or rent capabilities as well as build?

For more on the Australian Major Bank Results click here.


[1] Westpac FY18 Investor presentation – page 66

More about the authors

Steven Cunico

Steven Cunico

Partner, Audit & Assurance

Steven is the lead Partner in Deloitte’s Treasury Advisory practice. Steven has over 18 years’ experience in Australia and the UK auditing and advising financial institutions and large corporates on financial risk and finance matters, including financial instruments accounting, in particular IAS 39 and IFRS 9, financial instruments valuations and impairment. Steven leads a national team of 60 professionals with deep experience in financial risk matters including credit risk, market risk and liquidity risk. The team also consists of experts in banking regulations specific to market, credit and liquidity risk as well as regulatory capital. The team also consists of experts in quantitative finance and financial product valuations, modelling and pricing.

Tony O’Donnell

Tony O’Donnell

Lead Partner, Consulting

Tony has over 20 years’ experience specialising in enabling and delivering large, complex operational, technology and strategic change within organisations. He has successfully led large-scale transformation programs in multinational companies across a number of sectors including financial services and utilities, in Australia and globally. Tony leads the Strategic Cost Transformation in Australia as part of the broader Deloitte global capability. Tony is recognised as a strong leader of people, and is very passionate about bringing innovation to the projects he, and his team deliver based on operational and business excellence principles.