Resolve to change

7 November 

Headline cash earnings at Australia’s four major banks in 2017 grew by 6.4 per cent to a record $31.5 billion, with Return on Equity (RoE) increasing by 21 basis points to 13.94 per cent, however enthusiasm has been subdued with banks aware of the challenges that lie ahead.

PwC Australia’s Banking & Capital Markets Leader Colin Heath said the results were largely driven by mortgage credit growth, a reduction in bad debt expense and work on the cost base by the banks.

He said that the pressure on interest margins, outlook for credit growth and increase in non-financial risks faced by the industry were clearly challenges that were being acknowledged, with actions from the Major Banks in response becoming clearer and more distinct.

“While the results are strong, the banks have shown that they understand the challenges they face,” Mr Heath said.

Net interest margins decreased by 5 basis points in the last year despite a re-pricing of investor lending and interest-only loans, while non-interest income increased by 4 per cent to $24.6 billion in the same period.

“Given fierce domestic competition and the focus from regulators on pricing, it is hard to see margins improving,” Mr Heath said.

Credit growth held up, mainly driven once again by housing credit which grew by 6.6 per cent in the 12 months to September 2017. By contrast, business credit grew by only 4.3 per cent over the last year, down 50 basis points.

Despite the focus on housing and household debt, overall credit quality remained sound, with bad debt expenses falling to $4 billion, down 23 per cent on the previous year.

“The handful of large losses on corporate loans and the downturn in the mining sector which we saw last year, have not been repeated and while we have seen some of the banks highlight overlays on their mortgage books, bad debt expense is really as good as it gets.” Mr Heath said.

“Australia’s major banks acknowledge they need to change and become more deeply connected to the customer and the community. The plans for each of the banks are becoming clearer through actions that they have taken in the past six months as well as announcements made alongside annual results. This is showing a greater differentiation in strategy than has been seen for some time - from IT infrastructure to customer selection, channel mix and vertical integration.”

As part of this, efforts to reduce costs have continued over the last year, with the expense to income ratio falling to 43.36 per cent, down 95 basis points on the prior year. Average full time employee numbers fell across the banks by 0.3 per cent.

“Efforts to simplify and improve the efficiency of bank operations are starting to come through in the numbers, but there is more to do,” Mr Heath said.

“Though the financial position of the banks is as strong as it has ever been, the industry must continue to work through important challenges, with non-financial challenges arguably even more important than the financial ones.”

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