Now that Australia’s “big four” banks have reported their full-year results, it’s clear the royal commission and slowing property market have had a significant affect.
Those were the findings of consulting firms PwC and Deloitte, in two separate reports released earlier this week.
But it was considered a disappointment compared to previous years, since their collective earnings dropped by about 6 per cent (or $1.7 billion).
The major banks’ results show that “returns [will] remain under pressure for the foreseeable future”, PwC said in its report.
The firm also observed there were other concerning items in the banks’ collective results. Namely, return on equity had fallen to 12.5 per cent, their “lowest level” since the global financial crisis.
PwC said this was due to “significant customer remediation and regulatory, compliance and restructuring costs materialised”.
There was also a substantial ramp-up in expenses (compared to its income) in the last six months to 46.35 per cent — up by a sharp 3.55 percentage points since the previous year.
In addition, the major banks’ net interest margins — the gap between what they pay to borrow money and the interest rates they are lending at — fell below 2 per cent for the first time in the second half.
“A broad range of factors, rather than any one thing in particular, drove this decline,” said Colin Heath, PwC Australia’s head of capital markets.
However, there were some positives to be found in the major banks’ results.
Record low debt, and upcoming risks
Last year, the Australian Prudential Regulation Authority (APRA) forced the big banks to lift their minimum safety reserves.
This has led to the “big four” having “capital and liquidity positions [achieving the] … ‘unquestionably strong’ target for capital which places them in the top quartile globally”, said Steve Cunico, Deloitte’s head of capital markets.
“Credit quality has also held up, with credit impairment expense as a proportion of lending at a decade low. However, there are early signs of a slight increase in delinquencies.”
Similar sentiments were echoed by rival firm PwC, when it noted that the banks’ bad debts had fallen to a “record low” of $3.3 billion, down 17.7 per cent since last year.
“Credit losses, at 12 basis points of loans and advances, are now lower than at any time in the last 25 years,” PwC said.
Some of the biggest challenges for the banks, going forward, are expected to come from the non-bank lenders, particularly when the “open banking” commences on July 1, 2019.
Essentially, it will be a new regime backed by the Federal Government which forces the major banks to share customer data, at their request, with other companies.
It could be potentially useful to customers wanting to switch banks, or move to another company which offers financial services.
“The major banks’ share of credit is starting to decline, with non-banks in particular seeing a notable lift in lending, reaching 27 per cent on an annualised basis for the third quarter of this calendar year,” Mr Health said.
In the last financial year, Deloitte noted that the lending done by major banks grew at a sluggish 3.1 per cent — and that growth rates below 5 per cent are likely to be “the new normal” and “the lowset growth rate in a decade”.