In their core markets of retail deposits and home and consumer lending they continue to produce strong numbers in terms of market share. The Regionals managed to increase profit before tax by 16.1 percent, with three of the four banks recording growth in profits.
KPMG banking partner Martin McGrath said: “There is a good story in these results for customers of the Regionals. Market share has been strong and margins have remained tight, rising just three basis points to 1.64 percent. However, shareholders would be concerned about a return on equity for the sector of 6.7 percent.” The strongest performer in this regard was Bendigo and Adelaide Bank with a return on equity of 9 percent.
The driver of the increased profit was lower bad and doubtful debt expense, similar to that of the major banks. This is a pleasing result given the impact of the extreme weather events in Queensland and Victoria. These events have had a disproportionate effect on this sector, given two of the four Regionals are based in Queensland.
A major challenge for the Regionals is how to access funding at a competitive price. “The Regionals have shown that they are a competitive force in the retail deposit market. However, they are at a competitive disadvantage in wholesale markets, which impacts their interest margin,” Mr McGrath said.
Alternatives to retail deposits remain expensive for this sector; however, the opening of a market for covered bonds is potentially a positive development. “It remains to be seen how much uptake there will be by the Regionals of covered bonds. It is clear that the scale of the major banks gives them an advantage, but the advent of covered bonds opens a welcome alternative source of wholesale funding.” Mr McGrath said.
A core feature of the Regionals’ results is in their competitive cost to income ratios. “Despite their smaller scale, the cost to income ratios reflect well-managed institutions. Across the sector the cost to income ratio averaged 52.2 percent, a very credible performance,” Mr McGrath noted. Bank of Queensland led the way in this regard with 44.5 percent, a ratio that compares well with any of the major banks.
“2012 will continue to provide a tough test for the Regionals with expectations of subdued growth and strong competition from the majors,” Mr McGrath added.