Record result, but eyes return to the horizon

Banking Matters Major Banks Analysis FY23 Full-Year

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‘Goldilocks’ monetary tightening lifted bank earnings and confirmed the competitive reality of Australian banking. FY24 promises more uncertainty, vigilance and focus.

Record full-year result, though the bounce from rates was shorter and shallower than expected

The major banks delivered a record $32.5bn cash earnings, up $4bn year-on-year (yoy), and well over the previous $31.2bn record earnings in FY17. The extraordinary combination of healthy asset growth (7.2% growth in interest-earning assets) and 11bps of NIM uplift saw interest income rise by a full $9bn, something that has never happened in the history of Australian banking. To that $9bn growth in interest-income uplift the majors added $0.8bn in earnings uplift from the continued decline of notable expenses, a cost item that has been falling steadily since its peak of $5.6bn in FY20 to less than $1bn in FY23. Finally, other operating income rose modestly for the year (up $0.6bn), notable not for its size but that the last time that happened was FY14, when OOI was almost $10bn higher. That’s $10.4bn in additional pre-tax profit, so it’s no surprise banks delivered a great result. In the other direction, credit expense and operating expenses (and tax) rose just under $7bn, bringing the net earnings increase to $4bn. 

Credit expense rose $3bn (after-tax), which was less about a sharp deterioration in the credit environment as it was about a return to positive credit expense levels following recent years of adjustment to provisions raised during the pandemic that dampened net credit expense. Operating expenses also rose over $2bn after tax, or 5.7%. This was comparable to overall inflation for the year and the previous year’s high inflation, when consumer prices rose almost 2% every quarter. 

The end result was to see RoE up 138 bps for the year to 12%. This is the highest it’s been in five years, but well-short of the 13.6% return recorded in FY17 when the last earnings record was hit. This is because average equity ($272bn) is up $3bn on the year and $43bn more than in FY17. 

What’s more, this earnings bounce was short-lived. Second-half earnings were down 10% as competition eroded margin and slowing loan growth caused interest income to go backwards, while expense growth accelerated.

Earnings and returns

Cash earnings
+14% yoy -10% hoh

Cash earnings hit a record $32.5bn, up $4bn from $28.5bn last year, driven by loan growth, NIM expansion and a reduction in notables. It’s higher than the last record result, six years ago ($31.2bn), when the industry was very different to today.

Hoh was a different story, with a $1.7bn reduction driven by lower margins, slower credit growth and rising costs.

Return on equity
+138 bps yoy -138 bps hoh

At 12% for the full year, bank RoE is the highest it’s been in five years. However, after hitting 12.6% in 1H, it fell back to 11.3% for 2H where it has tracked for some time, even prior to the significant risk free rate increases over recent periods.

All things considered, it has been a ‘Goldilocks’ economic tightening. Will it last?

Credit and expenses went the other way, as mentioned above, but not too much. Credit losses rose $3bn, which seems like a lot, but merely reflects a return to positive credit expenses after two years in which it was either a credit (‘benefit’) or negligible. As a share of the balance sheet, it still reflects muted conditions. Expenses rose over $2b, most of which was in the second half as expense growth accelerated to 7% annualised.

This was the key to the resilience of the FY23 result. The fiscal and monetary tightening undertaken over the past two years has indeed brought inflation down, and restored balance to many economic settings, even if not as quickly as hoped. And it did so without the negative consequences that often accompany such changes. The pain that is spread across household and small-business balance sheets is changing behaviours without (yet) undermining the health of the labour market, asset quality overall, or the fundamental outlook for Australia’s economy.

The system shook, and it did not break. Can this last? 


Net interest margin
+11 bps yoy -7 bps hoh

Whilst NIM increased over the year, this was a purely 1H story, with NIM likely peaking in the first quarter.

Since then, despite an additional 50bps increase in the cash rate (as well as fixed-rate loans expiring and rolling to newer rates), NIM has been on a downward trend. This is due to rising cost of funds and aggressive competition for lending and deposits.

Other operating income (ex notables)
+4% yoy flat hoh

Up 4% driven largely by a boost to trading income. While this provided a boost to OOI this year, other sources continued on their downward trends with fee and commission and wealth income falling.

Outlook clouded by new challenges

To answer that, it’s worth returning to the four critical transitions we have written about in the past, and which we see as critical drivers of evolution for this industry and indeed the broader economy: economic, energy, fiscal and digital.

The first of these has been proceeding quite smoothly thanks to the ‘Goldilocks’ tightening Australia has experienced so far. Nevertheless, banks head into FY24 with a sense of caution. Accumulated stresses on household and business balance sheets, in both Australia and around the world (especially in the US and China) led to overseas tremors that shook confidence around the world at the beginning of the calendar year, but so-far have not undermined economic fundamentals. 

However, for the banks, long-term trends in expenses, credit, OOI and margins (recent history notwithstanding) have not been accretive to earnings for a very long time, even under benign conditions. While NIM remains healthy, balance sheet growth may struggle to be sustained in the event the economy turns down. What’s more, global sentiment has notably shifted. Consumer confidence in most markets is at recessionary lows, businesses are being more cautious, and the trauma of events in the Middle East opens an entirely new dimension of global macro uncertainty. 

As a result, many are decidedly more sober about the outlook for the year ahead than even six months ago. However, we are not fatalistic. We also, at a time like this, are conscious of Australia’s many strengths, and that its banks are well positioned to manage through difficult times while staying focused on long-term opportunities and priorities. 

The energy transition continues to be a major challenge for society (which may be especially acute when Australia enters its first ‘El Nino’ summer since 2015), but remains an enormous and still-barely-tapped opportunity for banks and the financial sector. The fiscal transition is likewise proceeding, with expectations of further pullback in public (commonwealth and state) financial capacity creating additional space for private capital to deliver critical infrastructure and social service needs. Finally, the story of the digital transition introduced a new chapter in FY23 as the latest-generation of Generative AI (GenAI) models bring this capability to every person in Australia. 

In short, while there are many things that could go wrong in FY24, and we are realistic about the likelihood of challenging times ahead and critical risks to manage, the long-term opportunities for this industry have not diminished.


Operating expenses (ex notables)
+5.7% yoy +3.5% hoh

Expense growth picked up in 2H after a reasonably-restrained 2.7% rise in 1H. As before, the key rise was in personnel expenses with cost per employee increasing 5.7% yoy amplifying a yoy increase of 1.95% in employees. Recent announcements suggest employee expenses growth may slow in the coming year.

Expense-to-income (ex notables)
-268 bps yoy +234 bps hoh

With a 12% rise in total income, it’s not surprising expense-to-income fell. However, it picked up in 2H as income fell while expense growth rose.

Overall, at 45%, it is still 2% higher than the last record earnings period, demonstrating the dependency of this year's result on NII growth.

Preparing for an uncertain tomorrow while staying focused on the horizon

At a time like this, with the outlook and sentiment changing as rapidly as it has over the past 4-6 weeks, being prepared for what may be a more difficult 2024 is obviously important. At the same time, it’s important to remember that Australia, and Australia’s banks, remain in terrific shape. They have the capacity to not only successfully navigate challenging global conditions, but potentially secure long-term advantage from them as well. 

How? By staying focused on the four themes driving strategic imperatives in banking today. We have described them in the past, and believe they are worth revisiting again: 

Squeeze on the core

Doubling down on digital

New sources of value and growth

Tests of resilience and trust

Asset quality

Credit impairment expense
+$2.9bn yoy +$0.1bn hoh

Credit impairment returns to an expense after four consecutive halves of being a benefit (i.e ‘credit’) or negligible. However, as a share of GLAA (9bps in FY23) this is still lower than the years before the pandemic (~14-15bps).

Credit provisions
+7.5% yoy +2.9% hoh

Provision coverage rose to 60bps of GLAA. Except for the first two years of the pandemic, this is higher than it has been since 1H15 (pre-AASB 9 and expected credit losses). Yet the share of these provisions related to impaired assets is small, and actual impaired assets ($7.4bn) as share of the portfolio (24bps) remain at record lows. This indicates the level of provision held to address the uncertainty and caution in the economic outlook.

Hot topic: Into the age of AI - finding your marathon pace

In FY23, one of our ‘critical transitions’ delivered a twist: Artificial Intelligence (AI) has turned a corner. The race to win is underway, is urgent, and adds an entirely new dimension to the imperative to ‘double down on digital.’

But it’s a marathon, not a sprint, and requires FIs to strike the right balance between prudence, urgency, ambition and sustainable pace. There are real risks in trying to go too fast, without critical skills, tools and capabilities in place. There are also risks in moving too slow. That means leaders need to get smart about AI—not just generally but also very specifically in the context of FS—and start taking pragmatic steps to get moving today

Balance sheet

Lending growth rate
-232 bps yoy -32 bps hoh

Despite having slowed from 7% last year, this was principally driven by a sharp reduction in first half growth. Although the rate of growth is still well off the levels reached in the last great borrowing surge of FY11-15, the larger balance sheet means net lending volume still grew $12bn per month.

Common equity tier 1
+89 bps yoy -28 bps hoh

Up from FY22, thanks to the implementation of capital reforms, which drove a 70bps (average) increase for the majors. Three of the majors have announced a buyback program, with one having already commenced within the period.

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Banking Matters: Major Banks Analysis

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

Beatrice Fitzgerald

Banking and Capital Markets Director, PwC Australia

Tel: +61 430 445 285

Barry Trubridge

Financial Services Leader, PwC Australia

Tel: +61 409 564 548