Banking Matters

Major Banks Analysis: June Quarter Snapshot

Current and future banking trends from Australia and across our global network.

Major Banks Analysis: June Quarter Snapshot

Our review undertaken in May found that Australia's major banks had to work hard in the first half of 2017 to maintain momentum, with two key factors supporting their results: continued growth in Australian housing lending and reductions in credit losses. In the quarter just passed, the story has remained largely unchanged as major bank executives executed the strategic and portfolio changes made to date. Slow but consistent progress has been maintained on earnings; future capital requirements are becoming clearer; in the short term, margin pressure has somewhat abated, and cost management appears, at least for now, to be pushing ahead

Despite the current sense of calm, it’s still worthwhile contemplating any clouds that might lie on the horizon. Our reflections, notwithstanding the significant efforts the banks are making to transform their operating models, are that a number of risks skew to the downside, and that ‘tail risk’ in the overall environment may be at its highest level in a decade. Factors include the narrowness of the industry’s short-term profit drivers, fragility in the global financial system, changing monetary policy around the world and unprecedented levels of geopolitical risk. 

All of this is happening while community expectations of banks and their leaders continue to rise to new levels. Shareholders remain as demanding as ever; while customers, business partners, governments and regulators are seeking a level of transparency, accountability and hands-on control that, in Australia at least, we haven’t seen before. The Banking Executive Accountability Regime (BEAR), established in the most recent Federal Budget and described in more detail in our Hot Topic, is just the latest example of this trend. It won’t be the last. 

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Major Banks Analysis: June Quarter Snapshot

While we don’t see detail from all banks at the quarter, disclosures and system data do give us enough to infer certain trends. In simple terms, although there has been significant quarter-on-quarter variability (for example in 2016, when banks carried out significant restructuring), the overall upward trend in earnings appears to have continued in the June quarter. Similarly, banks are making measured steps to ensure they can comply with the 2020 Common Equity Tier 1 target of 10.5 per cent, as best understood today.

Credit losses (normalised for balance sheet size) have been on a downward trend since 2008 and are approaching historic lows.

Balance sheet growth also continues to deliver for the banks, although the narrative has become a little more complex than it was when growth was dominated by investment home lending. Mortgage growth on an annual basis continues to moderate. When we look at purely the recent quarter, this moderation is more stark, especially for investor housing - as intended by the regulators. Notwithstanding this moderation, mortgage growth remains the dominant driver, with only early signs of any pick-up in business credit.

As for margins, although banks did not reveal these specifically for the March quarter, disclosures about revenue growth and monthly gross loans & acceptances, as well as associated management commentary, suggest they were flat overall for the quarter. These were supported by the substantial repricing of investor and interest-only home loans over the first half of 2017. However, one would have to expect further repricing of this nature particularly on back books to be unlikely given scrutiny over mortgage pricing decisions. As future origination begins to skew more towards owner-occupiers and principal and interest borrowers who will be offered lower rates, we expect that in the absence of another catalyst for repricing, mortgages may shift from tailwind to headwind on overall NIM.

The good news is that banks have tools at their disposal to prepare for an environment that may be very different in twelve months. Stress testing of risk management frameworks has evolved considerably in recent years but has yet to be holistically tested. Prioritisation and acceleration of investments under consideration or underway may enable a shift in the enterprise risk profile to something more appropriate to future conditions. We will argue in the attached Hot Topic that BEAR offers one such opportunity, but there are many others.

Hot topic: BEAR

The proposed BEAR legislation is intended to provide clarity and specificity and, more importantly, provide the enforcement and sanction mechanisms available to APRA – who will then be expected to use them. In doing so, the legislation introduces new language to the regulatory landscape. The legislation may not be objectionable in its intent but it is understandably generating significant industry debate. 

Banks should not underestimate the challenge involved in developing a consistent interpretation of the legislative requirements, and rather should focus on the clarity afforded by the executive authority and accountability envisioned by the new regime. By streamlining decision-making closer to what we call the ‘chain of accountability’, organisations can become simultaneously more responsive and more deliberate. To realise this opportunity, however, organisations must do more than simply prepare to comply with the new requirements. 

In this Hot Topic, we offer our perspective on how to best implement the BEAR by identifying how to translate the changes into strategic advantage. We review the success of similar regulation, the UK’s Senior Managers Regime, and consider how Australian banks can benefit from lessons learnt, recommending five key actions on which banks can get started on today.

Read the hot topic

Perspectives on the BEAR

The UK experience and how Australian banks can benefit from lessons learnt

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How best to implement the BEAR and actions Australian banks can get started on today

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A bank's perspective of the BEAR

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Remuneration requirements and the BEAR

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Contact us

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

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

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

Hugh Harley
Financial Services Leader, Asia-Pacific
Tel: +61 2 8266 5746

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

Emma Grogan
Partner, People and Organisation
Tel: +61 (2) 8266 2420

Sarah Hofman
Partner, Risk & Regulation
Tel: +61 (2) 8266 2231

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