No Match Found
Australia’s major banks delivered record half year results and appear to be on track for a record full year 2023 result, with cash earnings of $17.1 billion in the first half of 2023, exceeding the previous half year peak of $15.8 billion in 2015. This growth was driven by a significant 14 bps increase in NIM, modest lending growth, large increases in trading income and notable expenses which fell to under $0.5 billion, over $1.3 billion less than the prior half.
Despite inflationary pressures, operating expenses rose only 2.7% half-on-half with a 7% rise in personnel costs offset by lower property and technology costs. Credit expenses remained low but more significant at $1.4 billion for the half. Provision levels now exceed $20 billion in anticipation of a difficult economic environment, with very limited loss experience to date.
However, this extraordinary earnings result was greeted with limited enthusiasm as it demonstrated the competitive reality of a simpler banking industry and the need for both discipline and diversification in the outlook.
Sam Garland, Banking and Capital Markets Leader at PwC Australia said, “With over $3.9 trillion in interest-earning assets, the recent NIM uptick has had a dramatic impact on bank income. However, given a 350 basis point increase in cash rates in the 10 months to March, that margin benefit has been shorter-lived and smaller than many anticipated - reflecting a highly competitive lending and deposit market.
“This is the reality of a much simpler set of banks - the base of income is now heavily focused in lending and deposits, which are extremely competitive and most banks described the NIM benefit as having peaked already. In the core business, the ability to continue controlling costs will therefore be key, as will the impact of a changing credit loss environment.”
Provisions for credit loss say more about the banks’ expectations than the experience they are seeing in borrowers today. At $20.6 billion they compare to gross impaired assets of $7 billion, illustrating both the lack of significant stress to date, but also the caution in the banks’ outlook.
Solid lending growth continued to boost net interest income which exceeded $37.5 billion in the first half of 2023, a rise of close to $4 billion half-on-half. This is $9 billion more than in 1H15, the last record for half year cash earnings. Underlying profit (ex notables) also rose $3.8 billion, the largest increase ever, and notable expenses, which averaged almost $3 billion per half in FY18-20, were under $0.5 billion.
“The good news for Australia’s major banks is that they appear to be arresting share loss, with last quarter’s lending growth rate approximating that of their nearest large competitors for the first time since pre-COVID.
“As for OOI, this increased again half-on-half, with a strong period of trading income returns more than offsetting continued decreases from sales of businesses. We see other sources of income as a key focus for the banks in the medium term given the tightening returns in the core business.”
Four key themes expected in the medium term requiring discipline and diversification
PwC Australia expects four key themes to play out in the medium term as a result of the economic, digital, energy and fiscal transitions Australia is experiencing, all of which will require commercial and execution discipline and some degree of diversification:
Mr Garland said these strategic themes arise in the context of a strong banking system and continued uncertainty, meaning decisions will be carefully taken.
“Overall, Australia’s major banks remain in terrific balance sheet and business model shape, with regulatory metrics well in the top quartile of international banks and businesses simple and focused. While this has led to a narrower base of earnings, it has also put our banks in a far stronger position to absorb volatility and explore new opportunities. The banks are likely to be extremely discerning of the risk/reward trade off in these decisions,” concluded Mr Garland.
To view the Banking Matters - Major Banks Analysis Half Year May 2023, click here.
Westpac's reported Statutory Profit to a Cash Earnings measure for comparability across the banks has been adjusted - all numbers reported are using the calculated 'Cash' basis.
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