Australia’s big four banks made a combined underlying cash profit of $15.63 billion in the first six months of their financial years.
This was an average rise of 6.25% in an increasingly competitive environment.
The average return on equity increased 8 basis points to 13.9% of and bad debt expenses fell 12.3% to $2.2 billion.
However, net interest margins, a key measure of profitability, fell an average of 7 basis points, a drop of about 2%.
The margins fell despite recent rises in home loan rates as the banks deal with increasing competition for deposits and higher funding costs.
Tim Dring, EY’s Oceania banking and capital markets leader, says the banks are facing low interest rates, intense competition, funding cost pressures and moderating credit growth, particularly in their business books.
“At the same time, heightened economic uncertainty is taking a toll,” he says.
“Locally, this is being fueled by high household debt, low wage growth and housing affordability challenges in Sydney and Melbourne.
“A possible downgrade in sovereign and bank credit ratings and, further afield, lingering offshore geopolitical uncertainties bring an increased risk of volatility in wholesale funding costs.”
The banks are also under increasing pressure from government, with the CEOs brought before a parliamentary inquiry to explain a series of scandals involving financial planning and other issues including why the banks didn’t pass on the full benefit of interest rate cuts to customers.
And today treasurer Scott Morrison announced a Productivity Commission inquiry into competition in Australia’s financial system. The investigation will look at competition in personal deposit accounts and mortgages and services and finance to small and medium businesses.
Westpac was today the last of the four to report half year results, posting a 3% rise in cash profit to $4.02 billion.
The earnings growth was led by the institutional banking business, which gained from higher markets income, lower impairment charges and costs. The charge for bad debts fell 26% to $493 million.
However, net interest margins fell 7 basis points to 2.07% mainly due to deposit competition.
The Commonwealth reported its half year results in February, a 2% rise to a record $4.91 billion.
Growth in profit is slowing at the banks as competition intensifies and loan growth eases.
The banks are also cutting costs and lifting most home loan rates as they deal with a regulatory clampdown on investment property loans.
The Commonwealth reported net interest margins, a key measure of lending profitability, falling 4 basis points to 2.11%.
At the NAB, net interest income, which shows the difference between interest earned on loans, fell 3.1%. Net interest margins fell 11 basis points.
At the ANZ, net interest margins slid 6 basis points to 2%.
Dring says the banks remain focused on retail banking operations to drive growth.
However, with the residential home loan environment clouded by higher risk and increased scrutiny, the banks are adopting a more cautious approach to growing mortgage books by tightening lending criteria
“While rate increases benefit the banks’ earnings and margins, they also have the potential to put additional pressure on an already highly-indebted household sector,” says Dring.
He says the banks’ ability to extract additional margins through differential rate repricing on residential property lending will become even more of a balancing act.
“We are seeing mounting regulatory, government and public pressure to curtail housing price growth, particularly in the Sydney and Melbourne markets, and this is likely to continue to build,” Dring says.
He says the banks are going to have to innovate if they want to grow profits.
“Advanced technology adoption and innovation-based operating models should be central to how banks reshape their businesses and they will need to engage with an ecosystem of innovative, external digital partners,” he says.