Breaking free from the commodity trap

Banking Matters Major Banks Analysis Half-Year 2024

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Strong but squeezed result reaffirms both the core strengths and structural challenges for Australia’s major banks…and the ‘Goldilocks’ environment that leaves space to address them.

Earnings and returns

Cash earnings
+0.8% hoh -9.4% pcp

Significant reduction on 1H23, driven by a close to 11bp reduction in margin and close to flat on the half and the second-highest half-year earning since 2017 (behind record $17bn 1H23 result). Lending growth couldn't quite offsite continued NIM contraction of 4bps hoh, while expense (and tax) increase was balanced by lower costs for credit, continued decline in notables and an uptick in non-interest income.

Return on equity
-2 bps hoh -141 bps pcp

Over 140bp reduction on the 'rate bounce' 1H23 and flat (down 2 bps) hoh. Although down on 1H23's 12.6%, at just over 11% the RoE for the past three halves remains substantially better than anything seen since before the pandemic.

In some ways, it’s back to the future for Australian banks - a strong (amongst records), steady result providing the flexibility for returns of capital. It was the second highest half year result since 2017…however long term trends appear to be resuming. Earnings were up slightly for the half and down significantly on a year ago, with margin pressure on mortgages and deposits yet to relent and not quite balanced by growing balance sheets. Non-interest income rose for the second time in twelve months but remains a small component of income. Expenses rose but were offset by falling notables and credit expense, as the economy continued its ‘Goldilocks’ course. 

Long-term challenges for the industry remain unchanged however, as ‘commodity trap’ dynamics continued in the half though the window to address them remains wide open. In principle, banks have everything they need to do just that. They have got themselves in great shape: healthy returns, simpler and safer. It’s remarkable to observe the questions now being asked include whether they might in fact be too simple or even too safe. 

That’s because the slow, but significant, trends of the last 15 years combined with the expanding capabilities and challenges we see ahead may require transformation more fundamental, and faster, than anything the industry has experienced in a very long time. They are also emerging at what looks like an accelerating pace.

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Breaking free from the commodity trap

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Perspectives on credit

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Goldilocks environment continues...


Net interest income (ex notables)
-0.8% hoh -2.4% pcp

Slight reduction hoh as modest overall growth in interest earning assets was short of balancing continued fall in NIM. Volume/margin tradeoffs remain critical in the outlook for NII - interest income hovered around $32b for nine consecutive halves before 2H22 before jumping to its record $38bn in the following.

Other operating income (ex notables)
+3.9% hoh +1.6% pcp

For the first time since the Royal Commission, OOI rose for a reason other than markets income. 1H24 saw the first notable rise in bank fees since the Royal Commission, albeit only 2.9% hoh, or $121m.


Net interest margin
-4.4 bps hoh -10.5 bps pcp

NIM fell a remarkable 11bps on the 'rate bounce' pcp and 4bps hoh, indicating the continued competition in mortgages and deposits may be slowing but remained acute in the half. On a simple basis, margin reductions in retail were circa 32bps on pcp and 9bps hoh, with business margins declining only modestly. Significant competition from, and some loss of share to, non-majors continued in retail.

Lending growth
-237 bps hoh -266 bps pcp

Lending growth slowed, driven by mortgages which continue to grow more slowly than business lending. In addition, the majors continue to lose share, accounting for just 50 percent of net lending growth in Australia for the half (net flow), versus a share (stock) of total lending which in March fell below 67% for the first time ever.

Banks strong and safe today - but need to break free for tomorrow?

These results were delivered in the context of a ‘Goldilocks’ economy that is, for now, still going strong. Despite the fears last year about the accumulated impacts of shock after shock, the Australian economy, along with most of the world, has remained remarkably resilient. 

Likewise, Australia’s major banks’ performance remains enviable on the global stage and with capital, both reputational and financial, at levels that place them arguably stronger than they’ve been in modern history. This is why we say the ‘window’ for success and transformation is as wide open as it’s ever been. 

It’s so strong, in fact, that the industry is starting to ask itself whether, after 15 years or more of de-risking, up-regulating and simplification, the banking system might have become ‘too simple and too safe’ (or at least too accustomed to stability), to support and adapt to the challenges facing the industry, and indeed Australia. 


Operating expenses (ex notables)
+3.4% hoh +6.4% pcp

Unsurprisingly given the inflationary environment, expenses rose again. They broke $20bn (ex notables) a year ago for the first time and surpassed $21bn for the half. The increase was primarily technology spend, which rose over 8% hoh, wages which rose with inflation, and small (~1,000, or ~60bps) decrease in FTE.

Expense-to-income ratio (ex notables)
+156 bps hoh +362 bps pcp

Expenses rose and total income was close to flat hoh, so naturally the expense-to-income ratio rose accordingly. At over 47%, it is back at the elevated levels of the pandemic. It fell dramatically thanks to rate rises which added +$5bn to income within 12 months. As the inflation which triggered those rises persists, cost pressures continue.

Fundamental change still in focus, perhaps at even faster pace

There is no doubt change is needed, and probably at a faster pace than in the past. The reasons are common across many banking markets across the world and are threefold: 


Notwithstanding a history of superlative returns when compared to other markets, the dominant drivers of growth in the industry appear to have developed into a commodity trap. That trap was hard to recognise when RoE was in the high teens. But it has slowly but surely developed as competition, simplification to fewer offerings and regulation created an industry with a narrower focussed, more commoditised offering and less willing to (or free to) take risk. The reality for many banking markets around the world is that writing new business above cost-of-capital is harder than ever, reiterating the challenges (and importance) of scale. Perhaps the clearest illustration of this is margin compression and non-interest income. Over the course of the rate tightening, margins have risen less than 10bp in aggregate and in retail margins fell 32bps hoh and 9bps on pcp. While business margins held up stronger, it is plausible that intense competition now shifts to that segment, slowly eroding the differential. 


Other operating income rose slightly for the half to $7.9bn but, as is well understood, now sits at more than $4bn lower per half than 2015 and at less than 18% of total income (in 2015 OOI was over 30% of total income), leaving Australia as one of the least diversified banking markets (in terms of income) amongst major economies.


The preconditions for growth of the past, unfortunately, have been steadily eroding. Earnings growth for the last few periods for the industry has rested on one key pillar: that lending continues growing faster than margins contract. The headwinds to that are greater than they have ever been.

As trite as it may sound, the state of technology capability, speed of developments and reach of technology-players into the banking value chain opens up myriad possibilities. Incumbent banks can legitimately contemplate unlocking untouchable topics such as core-banking systems, structural productivity gains and data-rich customer propositions. And at the same time, ‘hyperscale’ tech players on both ends of the broader ‘banking’ value chain continue to gain presence, power and advantage. Could they emerge as a new ‘choke point’ of the FS and Banking supply chain? Recent focus on ‘Tech-Reg’ and the level playing field for Banks vs Tech companies globally is symbolic of this concern. No matter the industry, as choke points form, value and profit tends to follow. ‘Big Tech’ needn't ever disrupt, disintermediate or otherwise replace banks to draw value out of their franchises.

Asset quality

Credit impairment expense (ex notables)
-12% hoh -15% pcp

Impairment expense down from $1.4bn in each of the prior halves to $1.2bn. The benign environment saw another fall in impaired assets, in the cost of new impairments, and a rise in write backs and recoveries.

Credit impairment loss rate (ex notables)
-1 bps hoh -2 bps pcp

Similarly to the credit expenses, the loss rate has fallen 1 bp from 9 to 8 bps. Recall that it had reached 41 bps in both halves in 2020. Gross impaired assets relative to GLAA also fell 1 bp hoh to 23 bps, having come down more than 40 percent from the 40 bps it reached in 2020.

Strength leaves window wide open - but requires taking some risk

As mentioned, the window for transformation is wide open. Fortunately, the strategic themes and imperatives are well known as we’ve explained in prior reports, with some additional emphasis added:

Address the squeeze on the core

Double down on digital

Meet coming tests of resilience and trust

Find new sources of value and growth.

For this report, we pay special attention to the need for new sources of value and growth. Finding them will require more than just strategic intent. It will require taking a fresh look at the customer offer, finding new ways to create value from data and being strategic (and judicious) about embedded finance

It will also require an appetite to be more active in addressing structural impediments to many of Australia’s critical needs. From housing to climate change to many things besides, there are opportunities to put capital to use that are not (yet) going to be as straightforward as simply making loans. It will be about making new markets rather than simply winning deals. 

That may require a fundamentally new operating model. We call it ‘shallow in the stack, deep into relationships’, and it may be what's possible as technology continues to advance. We aren’t suggesting it's feasible now. It could easily be a decade away (or more). But planning for such a transition is something banks must start talking about today.

Balance sheet

Provision cover
1 bps hoh 1 bp pcp

Provision cover broadly flat, with total provisions (up 2% to $21.3bn) rising with GLAA as credit conditions remain benign. Despite emerging signs of stress in specific segments often seen as 'early-warning' indicators, including unsecured consumer credit, early-vintage non-bank mortgages and parts of commercial real estate, these have been slowly building for two years now, with so-far no indication (yet) of broader contagion.

Core equity tier 1
+11 bps hoh +39 bps pcp

CET1 rose again as RWA (and asset risk weights) fell hoh while CET1 capital rose $0.2bn. T2 capital also increased $8bn.

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Banking Matters: Major Banks Analysis

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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

Barry Trubridge

Partner, Financial Services Industry Leader, PwC Australia

Tel: +61 409 564 548

Nina Larkin

Partner, Risk and Regulation, PwC Australia

Tel: +61 421 433 152