Profits at the big four banks have shrunk by a combined 5.5%

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  • The big four banks had $29.49 billion in combined full year cash earnings, down $1.72 billion or 5.5% from 2017.
  • Return on equity decreased by an average of 170 basis points to 12.2%.
  • Average net interest margins fell by an average of 1.25 basis points to 2%.
  • Bad debt expenses are at their lowest level in more than a decade, falling by 17.6% to $3.27 billion.

The combined cash earnings of Australia’s big four banks dropped 5.5% to $29.49 billion for 2018, hit by slowing revenue momentum and increased customer remediation and compliance costs, according to analysis by EY.

The banks’ lower earnings have also flowed through to return on equity (RoE), which fell by an average of 170 basis points to 12.2%.

Banks’ profits and returns are increasingly being squeezed by a slowing housing market, reducing borrowing capacity, customer remediation programs and higher costs.

Westpac was today the last of the big four to report annual results, announcing a flat $8.06 billion, on the back of higher costs relating to customer refunds during a “tough” and “difficult” year.

Last week ANZ reported full year cash profit down 5% to $6.49 billion, and NAB’s full year cash earnings dropped 14.2% to $5.7 billion. In August, the Commonwealth reported a 4.8% drop to $9.23 billion in full year cash net profit.

Here’s how the big four fared:

“Australian banks are facing significant challenges, both financial and non-financial, with the Royal Commission, regulatory pressures and a rapidly evolving competitive environment all pointing to ongoing sector disruption,” says Tim Dring, EY Oceania Banking and Capital Markets Leader.

“The Financial Services Royal Commission has reinforced the growing trust deficit between the community and the banks.

“Reputations have taken a battering as more revelations of misconduct within the industry, including the prioritisation of profits over customer interests, have come to light.

“The past year has seen the banks making sizeable provisions for customer remediation programs. However, more provisions maybe required and, as a result, profit growth may remain constrained in the near term.”

The banks have been revising lending policies to strengthen responsible lending standards.

“Tighter risk appetite is intensifying the competition for new low-risk owner-occupier borrowers, while restricting loans to high debt-to-income customers,” says Dring.

Growth fuelled by home lending is moderating, dragging on revenues. Higher margin investor lending in particular has declined.

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