Banks remain resilient despite ongoing global volatility
4 November 2011
- Cash earnings up 12.8 per cent YoY to $24.4 billion
- Revenue growth stalls in the second half
- EU instability and continued global deleveraging contribute to uncertain outlook
Australia's four major banks (ANZ, CBA, NAB and WBC) delivered strong combined underlying cash profit of $24.4 billion for FY11, a 12.8 per cent increase on the previous year, according to PwC's Major Banks Analysis.
PwC Banking Partner Mike Codling said: "Australia's major banks have again demonstrated their resilience by delivering a strong set of results in spite of tough local conditions and ongoing volatility in the global economic environment."
The main drivers of profit growth were the containment of costs, which increased by only 3 per cent in FY11, and the reduction in bad debt expenses by 31 per cent.
"Revenue momentum is the single biggest challenge in this environment. In the second half the majors' total revenue growth was flat," said Mr Codling.
Ongoing deleveraging and cautiousness across both businesses and consumers led to an anaemic credit environment. The system growth in FY11 for housing loans was 5.8 per cent, and in the second half was 3.9 per cent (annualised) - the lowest ever since 1976 when statistics began. Business loans system growth was a paltry 0.2 per cent in FY11.
The majors' net interest income rose 5 per cent, helped by a 1 basis point increase in net interest margins.
"With the weak revenue growth, the banks rightly focussed on cost levers and they should be congratulated for reining expenses in," Mr Codling said. "Costs will remain a priority in the immediate future. Deciding how to invest in the future and still contain costs will be a fine balancing act."
The four majors reported an aggregate Return on Equity (RoE) of 16.4 per cent for FY11, compared to 15.1 per cent for FY10. By global standards, the Australian banks continue to deliver strong RoEs.
"The RoE story is a good one. The challenge is to keep the story going in the face of continued global deleveraging and the uncertainties caused by the EU sovereign debt crisis, and with the new capital and liquidity rules on the horizon," Mr Codling said.
Net Interest Margins
Net interest margins increased 1 basis point (YoY) to 2.27 per cent as a result of some easing in competition for deposits and the positive impact of asset repricing early in the financial year.
"The outlook for the banks' net interest margins is finely balanced and will largely depend on their asset and deposit pricing strategies in a declining interest rate environment.
"Certainly, there has been no respite in the battle for business loans, home loans or deposits - in fact, competition has intensified of late. Even so, we believe the net interest margin outlook will be stable to slightly positive in FY12.
"One of the downside risks for margins is Europe. Any deterioration in Europe could cause another spike in international debt market prices. Plus the banks have got the spectre of a Ratings Agency downgrade hanging over them.
"So no doubt the banks will be kept busy considering alternate funding and pricing strategies and new investor bases," said Mr Codling.
Strengthening the balance sheet
"The banks have done an excellent job of strengthening their balance sheets since the height of the GFC. They've increased capital, significantly increased liquid asset levels, lengthened their funding profiles and reduced risk in their loan portfolios," Mr Codling said.
"At the same time, many Australian businesses and consumers have deleveraged and improved their balance sheets. And our policy makers have the relative luxury of still being able to use either of their interest rate or government debt levers if need be."
One phenomenon of this past year has been the extent to which deposit growth has outstripped loan growth, and enabled the banking system to ‘self-fund'.
"We expect the banks will self-fund new lending again through FY12, but they'll also be due to roll some sizeable wholesale debt in what could be very choppy markets.
"The beauty of holding so much in liquid assets, and now with the covered bond market opening for them, they have real optionality and capacity to deal with extreme turbulence," Mr Codling said.
Growth outlook
"While we expect non-resource businesses to recommence investing, the inflexion point is hard to pick. Growth in business lending is expected to remain thin at around 3-5 per cent in FY12, and home lending equally subdued at 4-7 per cent," Mr Codling said.
In the first half of FY11 the banks' wealth management operations were a highlight, but the weak equity markets encountered in the second half and an uptick in insurance claims dampened performance, with net income down 3 per cent HoH and up 3 per cent YoY.
"The prospects for wealth management still looks relatively rosy over the longer term, particularly given the proposed increase in the minimum employer superannuation guarantee contribution from 9 per cent to 12 per cent," Mr Codling said.
"Given the outlook for soft revenue growth across the banking industry, the focus on cost management and productivity improvements will only intensify.
"However, success will also depend on optimising revenue streams and we expect to see a good deal of product and marketing innovation to this end. Recent announcements on new payments options are a pointer to this, so too is the more competitive tone in marketing.
"And cross-sell will also feature prominently, both to enhance customer retention and to optimise revenue.
"The future is far from clear. We see global economic uncertainty, regulatory uncertainty, technological uncertainty and competitor uncertainty, and the list goes on.
"But, of course, uncertainty creates opportunity and the Australian majors are extremely well positioned, having proven to be so resilient and resourceful," said Mr Codling.
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