Cushioning the country through the crisis

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Cushioning the country through the crisis

Australia’s four major banks half year results FY20 Deloitte analysis

  • COVID-19 has caused credit risk to increase significantly - $3.4bn of additional loan loss provisions
  • Growth a major challenge – total income declined by 3% to $ 39.9 billion
  • The aggregate 1H FY20 cash profit of the major banks declined by $6.2bn to $8.3bn
  • Total operating expenses were up 14.2% to $21.5 billion
  • Bottom line results were impacted by $3.6bn of large, notable one-off items
  • Lending growth slowed to 2.9% however NIM declined by around 3bps
  • Capital and liquidity positions are strong – however dividends have been cut 

4 May 2020: The COVID-19 pandemic has brought the global economy to a near standstill, with many households and businesses having to hold back their spending and investment. Given their strong balance sheets, Australia’s banks and the four majors are extending significant support to Australian businesses and households, to help cushion them through the crisis.

However, the banks themselves have said that they cannot be expected to save the entire economy. ANZ CEO Shayne Elliott has said: “We are the Intensive Care Units of the economy, and, like emergency medical practitioners, we will ultimately have the unenviable task of deciding which businesses to save or not.”  

Steven Cunico, Banking & Capital Markets Partner Deloitte said: “Since the start of this year the majors have collectively lost approximately $116bn (~31%) in market capitalisation, so there is no question that the COVID-19 pandemic has brought extraordinary challenges to the Australian banking sector. The economic outlook for the next 12-18 months is incredibly uncertain. While the banks are well funded to support their customers through the crisis, they still have to make sure that they allocate their finite resources in the right direction.

“Nevertheless, the sector is well positioned to withstand the structural economic shock compared to their capital reserves going into the Global Financial Crisis. The Reserve Bank of Australia noted in its latest Financial Stability Review, that the stress tests of Australian banks show they have sufficient capital to withstand quite severe downturns.”

APRA chair, Wayne Byres, also recently pointed out that the Australian banking system is well capitalised by both historical and international standards. He said: “APRA’s objective in building up this capital strength[1] has been to ensure it is available to be drawn on if needed in times such as this.”

Cunico said: “This has enabled APRA to give the Authorised Deposit-taking Institutions the green light to use their buffers to continue to finance the economy. With capital management initiatives in place, plus existing robust capital, the banks are well placed to cushion the impact of COVID-19 for the country. However, in this environment they will need to be cautious taking on more credit risk.”

There is no question when it comes to growth, the length and depth of the economic contraction will be difficult to predict, Cunico said: “The combination of anaemic revenue growth and the lower-for-longer interest rate environment, heralds a very challenging outlook for the banking sector. This growing risk to earnings, coupled with an increase in provisioning to $21.5bn, has meant the banks have had to reduce dividend payouts.”

Deloitte Financial Services leader, Arthur Calipo, said: “Top-line growth will
be challenging in the short to medium term, which heightens the importance of strategic investment in transformational technologies to capture opportunities in the economic recovery and support a rebound in consumer and business confidence.

“The banks are already leveraging this crisis to accelerate their digital transformation and simplification for a post-COVID-19 world. They have adapted and responded to the crisis quite quickly with big percentages of their workforces working from home along with their contact centre employees. End-to-end loan offerings have been activated in days as opposed to months, and new reforms are being put in place to lift sustainability and productivity.

“This will require a renewed investment effort and reforms to increase digitisation, business model updates and reinvention, with innovation in new products, new services and new ways of working.”

Deloitte in its half year report of Australia’s four major banks, ANZ, CBA, NAB and Westpac, compare their results, their strengths and challenges across the key performance indicators of growth, efficiency, quality & risk, and capital & funding.

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[1] Over the past decade Australia’s big four banks have built their capital reserves to meet APRA’s ‘unquestionably strong’ CET1 benchmark of 10.5%, over and above the minimum regulatory requirement.

 

See more media releases and research at www.deloitte.com.au.  

 

Media contact

Louise Denver
Director, Corporate Affairs & Communications, Deloitte
T: +61 414 889 857
Email

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