Australia’s major banks enjoyed solid combined pre-tax earnings of $14 billion for the first half of the 2009-10 year. This was a strong gain on the $9.7 billion earned in the second half of 2008-09. Cash profit after tax of $10.4 billion was up 24 percent on the 2008-10 second half result of $8.4 billion.
Bank profitability is back to where it was prior to the global financial crisis thanks to experienced senior management, bad debts having peaked and the availability of funding improved. Cash return on equity was 15.7 percent compared with 13.3 percent for the second half of 2008-09. This is a strong result given the extra capital issued by the banks in recent years, although it was still well below the 20 percent plus returns achieved in the mid 2000s.
The majors’ loan impairment charges have fallen from $6.7 billion to $4.5 billion over the half year. Despite this improvement, the majors are approaching the coming 6 months with some caution as the middle market sector continues to show signs of stress.
(It should also be noted that the financial instability triggered by the worsening Greek debt crisis has increased markedly since the completion of our half-yearly survey, introducing a new element of uncertainty into the current outlook.)
The repricing of risk continued through the first half of 2010, principally in institutional and commercial portfolios. However, intense competition in the retail deposit market combined with higher wholesale funding costs and lower returns from holding better quality liquid assets put downward pressure on margins.
A new and evolving global regulatory framework is probably the major challenge facing Australian banks. However, we believe it is an opportunity to create a new consensus around how banks and other financial intermediaries can contribute to growth, wealth creation and prosperity. Such a development would be a welcome shift from the recent emphasis on the banks’ alleged role in wealth destruction.
Other important issues for Australian banks include:
- credit risk and pricing
- customer and public trust
- executive remuneration issues
- the evolving compliance agenda
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