CHART: More cost-cutting ahead at Australia's big banks as margins crumble

Charly Triballeau/AFP/Getty Images

The profits of Australia’s big four banks are sliding, weakened by falling margins, as competition intensifies and the cost of the funds for lending gets more expensive.

In the 2016 financial year, net interest margins were up an average of 1 basis point to 2.03%.

The four posted a combined $29.65 billion annual cash profit, about 2.5% below 2015’s record $30 billion.

The benefit from not passing on some of the recent falls in interest rates — for which the bank CEOs were called before parliamentary committee — hasn’t lasted.

“They have found it increasingly difficult to preserve their margins through mortgage re-pricing, offset by higher wholesale funding costs, holdings of liquid assets and a falling interest rate environment,” says Ian Pollari, KPMG’s national head of banking.

This means cost-cutting ahead.

“Against a fairly subdued economic backdrop, with regulatory capital a constant deadweight, the majors will no doubt be re-visiting their revenue and cost productivity targets and capital efficiency efforts to preserve their current levels of profitability and sustainability of dividends,” Pollari says.

Here’s how margins have slipped at the banks since the GFC:

Record low interest rates have brought intense competition in residential mortgages. It’s a game of volume to make up for the smaller margins.

Tim Dring, EY’s Oceania banking and capital markets leader, says low growth may be here to stay.

“With no signs of the external pressures easing, this low growth environment may well be the new norm and the major banks are managing their businesses accordingly,” Dring says.

“Cost discipline and efficiency remain top strategic priorities, and we are seeing the banks ramp up efforts to explore and develop advanced technologies to deliver the next phase of efficiencies.”

He says some of the banks have cut jobs as part of reshaping their business.

“But traditional cost-cutting initiatives are running out of steam and costs remain stubbornly high,” he says.

“Cost programs need to evolve to absorb the additional pressure from both slowing revenues and higher ongoing costs driven by regulatory and technology expenditure.”

He sees the next phase of efficiency will come from digital technologies to streamline processes.

Likely plays include collaborating with fintech or other digital players to accelerate innovation and the use of robotic automation to cut the costs of high-frequency and routine tasks.

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