“In a challenging external environment,” noted KPMG’s Asia Pacific Head of Banking, Andrew Dickinson, “the majors’ results reflect management’s dexterity in simultaneously managing the transition to new a regulatory framework, the imperative to reduce costs and invest in customer revenue growth.”
Going forward, however, Australia’s major banks cannot afford to be complacent, as Ian Pollari, KPMG’s National Head of Banking explained: “Constrained balance sheet growth and margin pressures highlight the need to grow other less capital intensive sources of income.
Banks need to invest in improving their cross-selling capability into products which deliver higher return on equity (ROE). While pre-tax profits have doubled over the last 10 years, return on equity in 2013 remains below the level achieved pre GFC, reflecting the impact of significantly increased regulatory capital requirements.”
This clearly emphasises the need to strategically counter low-revenue growth and a low interest rate environment to continue their earnings growth – as reflected in KPMG’s new report Major Australian Banks Full Year Results 2012-13.
The report found that they will need to deliver a range of productivity and technology investment initiatives to enhance their efficiency, while at the same time grow customer revenue and earnings.
This is especially important as strong competition is affecting their margins, which fell to 213 basis points, down from 217 basis points in the prior year – reflecting the impact of lower cash rates, the higher cost of retail deposits, and reduced returns on liquid asset holdings. These margins are the lowest on record (excluding the 2008 GFC aftermath) and were compounded by low, single digit growth in credit markets.
A key driver for the record profit result was a significant reduction in loan impairment charges, which were $5.0 billion compared with $6.2 billion in 2012.
In the coming years the banks will need to mitigate negative impacts while looking at areas that will ensure ongoing profitability. For example, continued improvements in costs will require more structural changes to the banks’ operating models in a number of areas – simplifying products and processes, migrating transactions to lower cost channels and increasing levels of automation.
The challenge will be in finding innovative ways to accomplish this, especially as the Australian majors are regarded (along with Nordic banks) as being the most cost efficient banks in the developed world, showing a decrease in cost-to-income ratios over the past 12 months from 47.0 percent to 44.3 percent.
With a continued focus on innovation and in response to consumers embracing greater use of new technology, the majors will be able to simultaneously drive further efficiencies in their distribution (and cost to serve) and improve levels of customer engagement.
This need to continually push for better ways of doing business and engaging customers is essential, as record levels of profit for the majors cannot be seen as a ‘given’.