Banking Matters

November Full Year Major Banks Analysis and Hot Topic: Seizing the accountability opportunity

Major Banks Analysis: Record financial result but off increasingly narrow base

At $31.5 billion, the combined cash earnings of the Big Four in 2017 are the largest ever, representing a $1.9 billion increase year on year (yoy) on FY16’s $29.6 billion (6.4%), and 1.7% increase half on half (hoh). At 13.94%, combined Return on Equity (RoE) is not only well above cost of capital, but also well-above the level to which many have expected bank returns to settle even a year ago. In fact, the industry RoE has stabilised around this level for two years now. 

The earnings increase was primarily driven by lending growth and reduced bad and doubtful debts (B&DDs), which alone accounted for one third of the increase in pre-tax earnings. On the revenue side, total interest income of $61.3 billion was up a marginal 1.7% (2.8% hoh), thanks to rising loan volumes (primarily mortgages) counteracting the contraction of NIMs by 5 basis points (bps) to 2.01% overall during the year, although NIMs were up 1bp hoh thanks to mortgage repricing. Another $0.9 billion came from non-interest income ($24.6 billion, up 4.0% yoy) driven by strong markets performance in the first half. 

Enthusiasm for these results has however been subdued. Notwithstanding the size of the headline numbers, banks understand that they rest on an increasingly narrow base. Sustainable revenue growth remains a question. The mortgage market continues to underpin bank revenue growth, but the combination of low growth in household incomes and increasingly vigilant regulators suggest this might not be the case indefinitely. In addition, the recent increases in certain mortgage rates to reflect restrictions on interest-only and investor home loans will encourage borrowers into other, lower margin products. 

Major Banks Analysis: November Full Year

+6.4% yoy, +1.7% hoh

Falling bad and doubtful debts, increases in non-interest income and flat cost delivered a record result.

+21bps yoy, -21bps hoh 

While there is still a divergence between the banks, the gap is narrowing and 13-14% appears to be the ‘new norm’ in analysis and expectations.

-5bps yoy, +1bp hoh

Net interest income grew 1.7% yoy to $61.3bn. Margin benefits of repricing were more than offset by deposit competition, funding costs and the markets/treasury impacts of a low rate environment.

-95bps yoy, -8bps hoh 

Average FTE are falling but investment spend, including regulatory and compliance spend remains high as the banks transform and reform. 

-23.0% yoy, -20.6% hoh 

Bad debt expense fell by $1.2bn though concerns for the outlook were expressed.

Seizing the accountability opportunity

Being an executive or director at a major bank in Australia today may feel like a Catch-22. On the one hand, the business outlook appears to be calling for a drastically different style of leadership: delegate, but remain in control; empower, but remain personally accountable; experiment, but ensure nothing goes wrong. On the other hand, the public, furious with some of the mistakes of the past, is demanding that senior executives take increasingly specific, personal and public accountability for what happens inside their organisations. Is it possible for bank executives to fulfill both imperatives?  

We believe they can - and in a moment like this, the personal choices taken by leaders have never been more consequential. They offer strategic break-away for banks prepared to fundamentally question convention, and professional distinction for the leaders who help them do so. 

If you are a leader in banking today, what can you do? We recommend taking stock of three elements of your leadership:

  1. Your focus: Get back to basics on what you prioritise and monitor in your processes, risk management and control frameworks.
  2. Your mindset: Ask yourself whether you are equipping yourself, and those you lead, with the cultural and mental attitude required. 
  3. Your vision: Define a new deal between stakeholders, to take charge of the agenda for your industry.

In our latest Hot Topic, we describe each of these elements, their implications for accountable executives and non-executive directors and, if you happen to be one, the questions you should be asking yourself. 

Contact us

Colin Heath
Leader - Banking and Capital Markets, PwC Australia
Tel: +61 3 8603 0137

Julie Coates
Financial Services Industry Leader, PwC Australia
Tel: +61 2 8266 2006

Sam Garland
Banking & Capital Markets Partner, PwC Australia
Tel: +61 3 8603 0639

Hugh Harley
Banking & Capital Markets Partner, PwC Australia
Tel: +61 2 8266 5746

Jim Christodouleas
Banking & Capital Markets Director, PwC Australia
Tel: +61 3 8603 2065

Bruce Hope-Maclellan
Director, PwC Australia
Tel: +61 3 8603 0190

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