According to KPMG's survey of Major Australian Banks Half Year Results 2013-14, released today, the majors will need to intensify their efforts to enhance productivity and realise further efficiency gains, actively manage margins across their business portfolio and maintain disciplined lending practices. In addition, the banks must continue to pursue focused growth strategies.
The majors' cash profit after tax of $14.7 billion for the 2013-2014 half year was up 6 percent from the 2013 second half year result ($13.9 billion), reflecting continued performance improvements.
“In the face of subdued economic activity, the majors have delivered sound profit results, primarily through continued lower impairments and solid revenue growth on the back of a more buoyant domestic housing market,” said Ian Pollari, KPMG’s National Head of Banking.
Overall revenue growth was modest, with flat non-interest income evident driven by mixed factors across wealth management and markets income at each of the majors. Non-interest income on a statutory basis increased marginally by $26 million to $12.0 billion, a rise of 0.22 percent over the first half.
“The pace of housing lending growth is clearly improving. And while some of the majors’ wealth management and markets businesses achieved stronger results, across the board it was an inconsistent picture. Overseas businesses, particularly in Asia are also delivering stronger levels of performance, albeit off relatively low bases for a few of the banks,” said Andrew Dickinson, Asia Pacific Head of Banking for KPMG.
Reflecting robust levels of competition in the market, the major banks’ net interest margins have continued to fall, declining by 5 basis points to 208 basis points compared to the previous half year period, driven by pressure on front book lending for mortgages plus corporate and institutional lending margins.
“The margin result is a by-product of a low cash rate environment, increased lending competition, lower earnings on capital and holdings of liquid assets. This was partially offset by easing deposit pricing and lower new issuance costs on wholesale funding,” said Mr Pollari.
An aspect of the result which will be hard to maintain is the continued reduction in loan impairment charges, which have fallen to $1.8 billion, down by $384 million compared to the 2013 second half year.
However, the half year result also indicated a rise in the level of stressed and overdue accounts, with 90 days+ delinquencies increasing by 7.0 percent over the previous period.
“While asset quality ratios show continued improvement for the majors, going forward they will need to remain vigilant as their credit risk management of 90 days+ delinquencies start to climb and, in particular, interest rates begin to rise,” said Mr Dickinson.
The majors recorded further improvements in their capital adequacy levels, with their Tier 1 capital ratios increasing by 28 basis points over the first half, above current minimum prudential requirements. “Whilst capital is a relative strength of the major banks, they will be focused on ensuring efficient management of the transition to new requirements, such as the D-SIB surcharge and conglomerates standards,” said Mr Dickinson.
The half year recorded an increase in the average cost to income ratio from 43.9 percent to 45.1 percent. “The majors have generally demonstrated good cost control over a sustained period however this result highlighted a mixed performance. They will be looking to deliver further productivity improvements and efficiency gains as consumers increasingly migrate more of their transaction activity from physical branches to online and mobile channels,” Mr Dickinson added.
The major banks’ recorded an average return on equity of 16.3 percent, compared with 16.0 percent in the 2013 second half year period. “Despite the extra capital needed to prepare for new regulatory requirements, the majors have sustained their current high level of returns,” Mr Pollari said.
“While the majors remain cautiously optimistic about economic prospects for the year ahead, much will depend on the impact that next week’s Federal Budget (and possible measures such as temporary increases in personal taxes) has on already fragile levels of consumer and business confidence, and more importantly, subsequent activity levels,” concluded Mr Pollari.