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Banking Matters

Simplicity raises focus on future

Strong, if uneven, financial result that was the cleanest in years, bringing focus to strategic fundamentals of banking for the road ahead

Simplicity raises focus on future

Earnings were up for Australia’s four major banks in a set of results that gives the clearest view of progress, challenges and future choices facing the banks and appears to put the pandemic-shock behind us. 

Higher earnings were the product of three key things including notable expenses that were negligible for the first time since before the Royal Commission and a significant credit provision write back, which enhanced earnings and helped reduce total provisions to the range of long-term averages. Meanwhile lending grew, driven by balanced growth in both business and home lending. 

It was another good result that was the cleanest in years, without the notable charges, large restructures and disposals, as examples, that have made it hard to see the ‘forest from the trees’ over the past decade.

Earnings and returns

Cash earnings
+11% hoh +5% pcp
$14.4b

CE up $1.4b on half, driven by reduced notables, reduced expenses (ex notables) and good lending growth, which offset a continued fall in NIM. Credit benefit for the half was lower than prior half and pcp but still a significant boost to results. These offset continued falls in non-interest income.

Clarity highlights progress, as well as future challenges and choices

The banks are looking to a future that is less familiar. The traditional core of growth for banks is increasingly competitive and the base of earnings has narrowed as a result of simplification. 

Lending growth has been unevenly shared with three non-majors taking material share, putting pressure on margins. Rising cash rates should provide some benefit, however the banks are managing expectations, especially as less balance-sheet-intensive earnings continue to narrow.


We are also entering an economic environment of inflation and rate rises that a generation of customers (and bankers) have never experienced. The immediate impact for banks is on costs, investment choices (scale) and productivity. The cost of living for banks is under pressure and they’ll have to work hard to contain it.

Meanwhile, new opportunities for banks feel closer than ever. The decarbonisation of the world will redefine Australia’s economy and the banks are transforming to play their critical role. Technology is also disrupting existing processes and customer experiences, creating opportunities for the banks while potentially redefining how and by whom financial services are provided. 

Credit provisions
-6% hoh -12% pcp
$19.1b

Once again down ($1.3b) due to gradually improving credit quality and mixed views on economic outlook. Provisions remain substantially higher than 2019 ($16.4b), both in relative and absolute terms (~66bps as a % of gross loans and advances vs 60bps in FY19).

With non-interest margins remaining low and non-interest income falling, expenses rising, and the possible end of capital returns and provision adjustments in sight, the future foundation of earnings growth comes into stark relief. Can the banks keep changing fast enough while executing on the here and now?

Notable items

Remediation
-50% hoh -56% pcp
$0.35b

Once again, a substantial reduction from the levels seen in FY19, 20 and 21 ($3.3b, $4.4b and $1b respectively), signalling a return to more ‘normal’ levels of repair costs. They are now comparable to levels seen before the Royal Commission in 2018.

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Reshaping the business
+$1.5b hoh +$0.95b pcp
$0.3b

A net benefit thanks to gains on disposals at two banks which compensated for a number of smaller charges to goodwill, capitalised software and other assets. Overall, substantially reduced relative to recent years as a large wave of restructuring and disposals is behind us.

Return on equity
+109bps hoh +29bps pcp
10.6%

Up with the significant increase in CE, back above 10%, supported also by the distribution of excess capital in the form of dividends and share buybacks which reduced average equity by c. $1.5b despite healthy balance sheet growth.

Balance sheet

Lending growth
-12bps hoh +596bps pcp
+6.7% (12 months)

Although down on the half, lending growth continues to be strong (if uneven), in both business and mortgage lending, which again sustained interest income in the face of a secular decline in NIM. Notwithstanding overall growth, as a whole the banks continue to lose share in mortgage lending in the face of aggressive growth by three large non-majors.

With so much in flux, we see five key landmarks on the horizon

We anticipate five constants that will determine what this industry will look like over the coming years:

  1. Investment, execution and delivery: in the immediate term the focus is on operational throughput and digitisation, completing transformation programs, remediation and change. More medium term, the pressure will be on costs with an increasing need to invest for future technology and opportunities, requiring a delicate balancing act on investment choices and prioritisation.
  2. Adaptability and growth: the degree to which banks can innovate and evolve to keep pace with the changing ways people store, transmit and exchange credit and value.
  3. Workforce and productivity: a key driver of performance which will become more crucial if system lending growth were to fade in the new economic environment.
  4. Trust: the area in which the industry has arguably made the most progress recently. Elevated focus in areas including cyber-security, sanctions, money-laundering and financial crime and now the climate transition will create more and more domains in which trust will be tested and earned.
  5. Societal leadership: The opportunity banks have, given their social capital, to provide genuine leadership on climate, housing, equality and our collective prosperity.

Banking Matters


PwC's Banking Matters series incorporates our regular Major Banks Analysis and industry Hot Topic. Our Major Banks Analysis provides in-depth analysis and commentary of the financial results of the four major Australian banks, with insights for local and global banking communities.

Our regular Hot Topic explores current and future banking issues and trends, addressing important challenges, opportunities and imperatives facing the banks including risk, regulation, remediation, transformation, workforce, technology, leadership, executive accountability, pricing and cost management.
At the same time, we bring together the right mix of advisers and contributors from inside and outside of PwC demonstrating that important problems are better solved together. PwC is a powerful multiplier of connections and innovation, we bring passionate people together so that insights become impact, opportunities become outcomes and society benefits.

Contact us

Sam Garland

Banking and Capital Markets Leader, PwC Australia

Tel: +61 3 8603 0639

Jim Christodouleas

Banking and Capital Markets Solutions and Capability Leader, PwC Australia

Tel: +61 3 8603 2065

Tom Gunson

Financial Services Industry Leader, PwC Australia

Tel: +613 8603 5895

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