The major banks' cash earnings are slipping

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  • The combined cash earnings of the big four banks for the half year slipped 1.7% to $15.2 billion.
  • Return on equity fell by an average of 88 basis points to 13%.
  • But average net interest margins improved 3 basis points to 2.03%.
  • And bad debt expenses fell by 21.7% to $1.7 billion.

The big four banks reported a 1.7% fall in combined cash earnings to $15.2 billion after tax for the 2018 half year.

Softening growth, profitability constraints and cost pressures were all having an impact in an increasingly complex and challenging environment, according to analysis by Tim Dring, EY Oceania Banking and Capital Markets Leader.

“Slowing housing credit growth, competitive pressures, higher capital requirements and regulatory impacts on volumes and costs all point to more a constrained earnings growth for the Australian banks in the short-to-medium term,” says Dring.

“During the first half of 2018, we have seen a decline in return on equity for most of the banks, reflective of low interest margins, a high competition environment and strengthening of regulatory capital. This is likely to be further compounded by the impact of increased expenditure on compliance and remediation.”

On average, the return on equity among the big four fell by 88 basis points to 13%. But average net interest margins improved 3 basis points to 2.03% and bad debt expenses fell by 21.7% to $1.7 billion.

Cash earnings for the half year: ANZ Bank up 3.9% to $3.49 billion; Commonwealth down 1.9% to $4.74 billion; NAB down 16.1% to $2.76 billion; and Westpac up 6% to $4.25 billion.

Dring says home loan repricing gave a tailwind for net interest margins in the first half of the year.

And the banks may be compelled to make further increases in mortgage rates if recent increases in wholesale funding costs persist.

“Stricter standards for loans look set to act as a brake on new lending by reducing customer’s borrowing capacity and may also contribute to slower house price growth,” says Dring.

“Muted wage growth and affordability constraints may depress prices further.”

The first half 2018 numbers for the big four banks:

Source: EY

Dring says digital transformation is at the top of the banks’ agendas as they seek to deliver a better customer experience, drive efficiencies and reduce costs.

“Automation and digitalisation offer the banks the possibility of applying new technologies to help bring cost-to-income ratios below 40%,” says Dring.

“At the same time, digital transformation will reshape the work force, including a shift in the type of talent needed and new ways of working.”

He says the banks also face regulatory and policy fallout from the financial services Royal Commission highlights which is revealing ongoing problems with bank culture, governance and remuneration.

“At the same time, the Federal Government’s push to increase competition in financial services is breaking down some of the longstanding barriers to entry that have protected the major banks’ structural advantages,” he says.

“Open banking, more flexible licensing options and the proposed legislation to ease bank ownership restrictions will all support financial service innovation and encourage greater competition in the sector.”

“It remains to be seen whether the resulting regulatory and policy outcomes will challenge the banks’ market dominance and pricing power.”

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