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Challenges, choices and complexities
Australian major banks FY2019 results: Deloitte Analysis
- Aggregate cash profit declined by 7.8% to $26.9 billion
- Total income declined by 3.7% to $81.3 billion
- Total operating expenses increased 0.8% to $39.4 billion
- Credit risk increased - 90 day past due and gross impaired assets over GLAs up 14bps
- Lending growth increased by 3.3% to $3.2 trillion
- The $6.8 billion total refund and remediation bill since 2017 is likely to increase.
7 November 2019: With the last of Australia’s four banking majors, NAB, reporting that as with the others its cash earnings today are down, the reality is the major’s return on equity (ROE) has halved over the past 15 years, with net interest margins, lower growth and fee reductions squeezing ROE closer to the cost of equity.
Each of the bank’s CEOs has called out the absolute focus on ‘fixing things’ from the past for customers and becoming simpler, more transparent and ‘value-adding’.
Steven Cunico, Deloitte banking, treasury and capital markets partner and author of Deloitte’s analysis of the 2019 full year results for the majors said: “Despite aggregate cash profit and total income being significantly down over last year’s numbers, by 7.8% and 3.7% respectively, the reality is that each bank is in the business of transforming itself to invest in better more ‘customer-centric’ products and services and stronger compliance and controls.
“The good news is that this is not just beginning. The transformation work has been going on in some instances for at least four years.”
Cunico said: “The majors can control their costs, and each CEO has been actively doing so. What isn’t easy however, is to do so while delivering top flight service, redesigning processes, and investing in compliance and technology. This is in addition to the culture changes that come with implementing APRA’s Banking Executive Accountability Regime (BEAR) which were effective from 1 July 2019.”
The Deloitte report called out the competitive nature of the sector by asking which bank will cross the ‘perception’ finish line first? A big challenge it identified in Australia’s domestic environment is that of non-financial risks. This is where broader societal and community expectations are demanding significant leadership attention and resources, and organisational culture, fairness and trust have become part of the national conversation.
Cunico said: “These community changes are the focus of the changing competitive dynamics, where foreign banks, non-traditional players, and the regulators identify where customers are having difficulties, and to the customer’s benefit they are finding new ways of easing the pain and shifting the control back to the customer. Open banking where the customer will own his or her own data by February 2020 is a case in point.”
The Deloitte report compares each of the four major’s numbers across the four business dimensions of growth, efficiency, quality and risk and capital and funding.
Cunico said: “It is good to see the banks are clearly responding to both APRA and ASIC’s call for a ‘Fair, Strong and Efficient’ banking sector with the full results showing that all the majors are on track to meet APRA's ‘unquestionably strong’ CET1 target of 10.5%. In the context of the RBNZ capital impact, both ANZ and Westpac will have the surplus capital to meet the requirement, and CBA and NAB’s views are, it won’t be material to them.”
In terms of anything surprising
“Even if you strip out the notable items e.g. $6.8 billion total refund and remediation bill since 2017, the overall result was still down, which means that underlying performance and profit is down. The effects of the last three rate cuts are yet to make their way through to the bank’s NIM due to hedging, however according to the banks it will impact NIM in future years by around 3-5 basis points.
“In terms of home lending, ANZ’s gross home lending picked up in Q4, and Westpac is also optimistic on its lending volumes despite the margin squeeze.
“With all the resources pouring over past control and conduct issues, some 1000 people at Westpac, and similar numbers at NAB, by the time the 2020 results come about in 12 months’ time, the past issues should be well understood. And hopefully there won’t be too many more unknowns; although it will take longer than 12 months to fix the historic issues.”
Cunico concluded: “The reality is that Australia’s major banks’ cost-to-income ratio and capital levels - i.e. how safe they are - are still world class. There is a lot to like about our banks. They are going through a rough patch at moment, but they will get through it and come out the other side simpler, leaner and more customer-centric.”
See the full report here.