Managing growth into the headwinds

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Managing growth into the headwinds

Half-year major banks results 2019: Deloitte Analysis

  • Aggregate cash profit declined by 4.1% to $14.5 billion
  • Total income declined by 4% to $41.1 billion
  • Total operating expenses were down 3% to $18.9 billion
  • Credit risk increased - 90 Days Past Due and Gross Impaired Assets/GLAs up 8bps
  • Lending growth increased by 3.7% however NIM declined by around 10bps
  • The total refund and remediation bill since 2017 stands at $5.6 billion.

7 May 2019:  Deloitte Australia Banking Leader, Paul Rehder said: “Large scale remediation programs, intensifying regulation and increased risk management as a result of the Hayne Royal Commission into Misconduct in Banking, Superannuation and Financial Services are the common themes of Australia’s major banks 1H-2019 results.

“The people and systems resources, finance and changes needed to meet these critical thematic programs, has meant that growth was a challenge for the big four major banks. Together they recorded a combined income decline of 4% to $41.1 billion and an aggregate cash profit decline of 4.1% to $14.5.billion for this first half of FY19.

“Looking ahead, the banks are accelerating their focus on productivity and the ‘core’ and continuing to keep their operating expenses down (to $18.9bn). All four CEOs announced simplifying their operations and offers, and where appropriate continuing their demergers and divestments.”

Steven Cunico, Deloitte financial services treasury advisory lead and author of Deloitte’s analysis of the 2019 first half-year results for the majors, said: “It has been a challenging half year reporting season for all four banks. While overall results for the banks appeared largely flat, the underlying detail shows divisional performance did vary. All four major banks experienced weakness in their retail businesses. However, they were able to offset this by recording growth in their business banking, institutional banking and New Zealand operations.

“Despite the headwinds and challenges of 2018 and the first half of FY19, our analysis shows that three of the big four were able to improve their cost to income ratios to 44.6% from 46.4% (1H 2018). Westpac was the differentiator here, announcing on Monday a cost to income ratio deterioration of around 8% due to large notable items,” he said.

Rehder said: “The majors continue to look for ways to reduce their absolute costs by simplifying their business models and moving to a utility style model of ‘efficiently’ seeking deposits and making loans. In such an operating environment of low growth and tighter margins, it will be very important to get both efficiency and business simplification right.

“Add to this the banks’ commitment to address the issues raised by the Royal Commission, and the nexus it raised between misconduct and institutional culture. Going forward many business units will need to readjust their business models, meet the regulators’ call for ‘meaningful change’ and evolve to align with the expectations of the community and once again earn its trust.”

Cunico added: “It was good to see the banks are clearly responding to both APRA and ASIC’s call to action for a ‘Fair, Strong and Efficient’ banking sector with the first half results showing that all four majors have met or are on track to meet APRA's ‘unquestionably strong’ CET1 target of 10.5%.

“The regulators also made it clear that banks can’t sell their historic issues, and will be held responsible for their past, which has placed a number of their planned disposals on hold. 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 $18.9 billion, representing a 3% decrease compared with the same half in 2018.

“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 between 42%-49%, significantly lower than their American and European peers (60%-63%).  Nevertheless, there are opportunities to trim the absolute cost base further to deliver sustainable long-term returns.

“Total deposit funding increased only marginally, in line with slower lending growth.  NAB and CBA grew their liability base mostly with increases in deposits, while ANZ and WBC relied more on wholesale funding.”


For further information see comparative analysis chart below and view our commentary.

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Half-year major banks results 2019: Deloitte Analysis

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