Australia’s big four banks booked a record combined $28.6 billion in cash earnings, an increase of 5.7%, in the financial year just ended.
They achieved this, in a market with shaky consumer confidence, largely on the back of growth in lending for housing and construction, plus tighter cost controls and a reduction in bad loans.
And the growth was achieved despite including the NAB results which showed an almost 10% drop in cash profits.
The big four, the darlings of superannuation funds because of their ability to deliver fully franked dividends year after year, are well supported on the ASX.
But the big question now, after years of record growth since the GFC in 2009, is: where will future earnings growth come from?
Australia has record low interest rates, with cash rates of 2.5%, but the banks are experiencing subdued loan growth on the business side of the books as companies keep costs and spending under tight control.
Bank margins — the difference between the cost of the funds and the interest rate they charge customers — are getting squeezed and are at a low of 2.07%, falling 5 basis points over 12 months.
Tim Dring, EY’s Oceania Banking and Capital Markets Leader, says there are some key challenges facing the banks including some potential forthcoming changes in the regulatory environment.
The expansionary monetary policy adopted by the Reserve Bank of Australia has stimulated demand in the housing sector with overall home loans rising by 7.2% from 2013.
“However, on the other hand, there are ongoing discussions around whether further macro prudential regulations are needed to curtail the impact of a possible housing bubble,” Dring says.
The major banks are also awaiting the findings of the Financial System Inquiry due to be handed down later this month.
Any recommendations, particularly around competition and financial stability, could have an impact.
“In this environment, expectations are high that the rules of the game may change, making continued growth an even greater challenge,” Dring says.
“There will be some banks that challenge their operating models, choose to loosen underwriting standards, some that compete on price and some that do a mixture of both.
“Each of these strategies comes with significant risks and their ultimate benefits may not be realised for some time,” Dring says.
A major factor in driving earnings is the high credit quality and low levels of bad and doubtful debt charges.
In the last year, bad and doubtful debts fell a combined $1.6 billion or 31.7%.
“The question now is, can the banks squeeze any more from this area?” says Dring.
And the major banks have had to establish strong disciplines around cost management.
A significant proportion of these savings are being reinvested into strategic initiatives including digital innovations and technology-led transformation.
“In the year ahead, the major banks will have to continue navigating through regulatory reforms around capital and liquidity, invest in their technology ecosystems and deal with the implications of the Financial System Inquiry’s recommendations,” Dring says.
“As the economic and political landscape continues to evolve in relation to monetary and fiscal policy, the challenge will be in striking the balance between earnings, growth, competition and stability.
“The banks that get this mix right will be better placed to take advantage of any future upswing in market sentiment.”
Here are Australia’s major bank combined 2014 full year results:
- $28.6 billion in cash earnings up from $27.1 billion in 2013, an increase of 5.7%.
- Net interest margins down an average of 5 basis points to 2.07%.
- Overall reduction in total loan loss provisions of $2.4 billion to $15.4 billion.
- Excluding NAB, return on equity improves by an average of 33 basis points to 16.8%.