Major banks' expect earnings slump to end - 4 November 2009
- Flat earnings for second year running
- First full-year increase in net interest margins since 1995
- Bad debt expenses double to $13.2 billion
- Banks poised to grow underlying cash earnings in FY10
The results featured a near doubling in bad debt expenses, largely offset by strong growth in net interest income and financial markets revenue.
Mike Codling, Banking Leader at PricewaterhouseCoopers said, “The banks have navigated the most challenging market conditions in over 60 years with considerable success.”
The banks’ emphasis on their balance sheet strength, particularly on raising capital, resulted in their combined average return on equity falling to 13.1 per cent from an average of 16.6 per cent in FY08.
“I suspect the new environment and regulatory requirements will lead to a re-evaluation of the longer-term returns that a highly regulated bank should achieve,” Codling said.
Codling believes the majors will continue to focus on driving higher deposit volumes – ultimately crucial to credit growth and supporting business activity.
“Of equal importance is how consumers will react as the Government stimulus is wound back and as interest rates rise. The Christmas retail season will be a key indicator,” he said.
“My sense is that the banks have turned a corner towards positive earnings growth after two years in a row of reduced earnings. In my view, net interest margins will continue to increase and I believe we may have passed the peak in credit losses”.
In a ‘big picture’ sense, the banks earned combined underlying cash profits of $18.0 billion in FY07, $17.5 billion in FY08 and $17.0 billion in FY09. This is despite a five-fold increase in bad debt expenses which rose from $2.4 billion in FY07 to $13.2 billion in FY09. If the bad debt expense return to more ‘normal’ levels in the future, the banks appear well positioned to improve their earnings.
“While some huge uncertainties remain, I’m cautiously optimistic about FY10, and certainly expect good earnings growth in FY11.”
The PwC Banking Gauge – a consensus view across leading bank analysts – is more bullish, predicting that the banks’ underlying cash earnings will increase by 13.9% in FY10.
Net interest margins
For the first time since 1995, aggregate net interest margins (NIM) have risen in full-year terms from 2.07 per cent in FY08 to 2.22 per cent in FY09.
Mr Codling said “The GFC has taught us that both deposits and loans were fundamentally under-valued”.
During FY09 the NIM was squeezed 18 basis points due to the re-pricing of deposits as competition heightened; but this was more than compensated for by a 28 basis points increase in lending rates, as higher funding costs were recouped and credit risk more fully priced.
“Predicting the future for net interest margins is fraught with danger. There are certainly some downside risks – expect competition for deposits to intensify, the proposed new prudential rules for liquidity would be harmful, and further disruption in wholesale credit markets cannot be ruled out,” Codling said
“But I believe that the positive momentum in recent months and the ongoing re-pricing of loans will lead to further increases to NIM in FY10.”
According to the Major Banks’ Analysis, solid deposit and NIM growth resulted in net interest income rising 19.8 per cent to $43.8 billion in FY09.
Asset quality deteriorates
The majors experienced a near doubling (97 per cent) in aggregate bad debt expenses (BDE) from $6.7 billion in FY08 to $13.2 billion in FY09. The average ratio of BDE to loans and acceptances reached 0.76 per cent – its highest level since 1993.
Mr Codling said, “The bad debt expense story has been a tale of two halves, with the growth in bad debt expenses stabilising in the second half”.
The first half saw impaired assets increase sharply, primarily as a result of a number of large corporate defaults. The second half has seen some pain start to emerge from the small to medium business sector.
“Loan write-offs will inevitably increase in FY10, however we believe that the banks are carrying healthy provisions and we’re cautiously optimistic that bad debt expenses have now peaked,” he said.
Deposits grow, lending subdued
Mr Codling said, “Economic stresses and increased risk-aversion across the board has resulted in deposits growing faster than loans, unlike the pattern we have come to expect for the better part of two decades. Since September 2008 deposits have grown 13 per cent in comparison to 11 per cent in loans.
“While domestic household and business deposits have delivered $74.7 billion in incremental funding to the major banks, existing borrowers repaying debt wherever possible,” he said.
Total business lending for the banks fell 4.6 per cent in the year to September, in contrast to the 23.9 per cent per annum growth achieved for the year ended December 2007.
Media Contact
TJ Yen
Communications
PricewaterhouseCoopers
Tel: +61 2 8266 4642
Mob: 0416 117 818
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 154,000 people in 153 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
"PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
Contacts
- TJ Yen
- Communications Manager, Sydney
- Tel: +61 2 8266 4642
