The profit streams are weakening at Australia’s big four banks.
Cash earnings came in at a combined $14.81 billion for the latest half-year, a fall of 2.5%.
Profits have been eroded by higher capital requirements and by a sharp rise in bad debt charges, according to analysis by accountancy and advisory group EY.
The combined 2016 half-year results of the Commonwealth, Westpac, NAB and the ANZ:
- $14.8 billion in cash earnings down from $15.2 billion, a fall of 2.5%.
- Return on equity fell by an average 244 basis to 13.8%.
- Average net interest margins are stable at 2.02%.
- Bad debt expenses have increased by 52% to $2.5 billion compared to the 2015 half-year results.
“External pressures are squeezing the Australian major banks’ performance,” says Tim Dring, the EY banking and capital markets leader.
“The past six months have been characterised by stock market volatility, escalating concerns about the trajectory of global and economic growth, concerns over falling oil prices and indications of slowing growth in China.
“In this environment, the banks’ share prices have continued to fall, in a market now highly sensitive to strategic announcements.”
The Reserve Bank’s reduction in the cash rate this week to an historic low of 1.75% means the banks may face further margin pressure.
The NAB was today the last bank to report its half-year results with a 6.5% rise in cash profit of $3.31 billion. Earlier this week, the ANZ posted a 24% fall to $2.8 billion and Westpac a below expectations 3% rise to $3.904 billion. In February, the Commonwealth a posted a record $4.804 billion, a 4% rise.
Dring says tight management of costs is the key to maintaining returns.
But increased regulatory and compliance costs, coupled with the need to invest in innovation and growth programs, are reducing the impact of the banks’ efficiency measures.
“The banks have been pulling hard on a range of cost levers,” Dring says.
“One of the key areas they are focusing on is how to deliver sustainable cost efficiencies through better use of technology. Ongoing advances in automation technologies, such as robotics, are challenging the traditional business case for digitising banking operations — disrupting offshoring and outsourcing models.”
“However, in a lower growth environment, the banks will need to consider a more holistic approach to automation to maximise return on investment. A vital component of this will be engaging more fully with their work force on what increasing levels of automation may mean, particularly for those undertaking manual processing roles.”
Tring says a rise in non-performing loans is a clear signal that the credit cycle has finally turned. The end of the mining boom, a downturn in commodity prices and the generally softer economic environment are challenging asset quality.
Here are the bad debt charges across the big four banks:
“This has been marked by home and personal loan losses in the resources states of Queensland and Western Australia, as well as in a number of individual corporate exposures,” Dring says.
“Softening demand for apartments and flat rents for commercial property in select markets and exposure to the dairy industry in New Zealand are also adding to the pressure.”
However, the increase in non-performing loans is off a very low base and is occurring in pockets, rather than across the board. Dring says the bad loan rate is returning to normal after a period of unusually low levels.
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