Australia's major banks (the majors) have weathered global financial conditions and posted a solid profit for the 2010-2011 full year. The majors' cash profit after tax of $24.2 billion for the 2010-2011 full year, was up 11.5 percent from last year’s cash profit of $21.7 billion, according to KPMG's survey of Major Australian Banks Full Year 2011, released today.
The increase in profit was largely due to flat margins on moderate growth in lending assets, reduced loan impairment expense and tight cost control. This was partly offset by reduced contributions from wealth management and insurance businesses and a reduction in markets revenue– mainly due to significant volatility in the fourth quarter. Statutory profit before tax was $31.9 billion for 2011 compared to $28.5 billion in 2010.
KPMG’s Head of Banking, Andrew Dickinson said Australia’s multi-speed economy produced tough conditions for revenue growth: "Personal and business lending was subdued as borrowers continued to be cautious, and system deposit growth was more than four times higher than system lending growth as householders and businesses continue to deleverage."
The majors’ margins were flat, (except for CBA) and reflect higher funding costs, which have offset repricing of commercial and retail loans. Margins were also negatively impacted by higher holdings of liquid assets driven by regulatory change. "Flat margins will be an increasing challenge to future growth, as low growth leads to heightened competition for new lending,” Mr Dickinson added.
The performance of Australia’s major banks is very different to that of the European and global banks (especially investment banks), which are struggling to make a double-digit return on equity (ROE).
The Australian major banks' ROE is an average of 16.7 percent compared with 15.9 percent full year 2010. "ROE is improving but not back to levels of 2007. The 2011 results are produced from higher capital holdings. This will represent a continual challenge for the majors as global regulatory standards require increased capital holdings to shore up the stability of the financial sector," said Michelle Hinchliffe, KPMG's Head of Financial Services.
"Australia’s banks are healthy but not immune to the gloomy European environment and market volatility. Their performance in uncertain global conditions is laudable, but not an indicator of easy times ahead," she added.
Asset quality continues to improve with loan impairment charges reducing from $8.4 billion to $5.3 billion. "The reduction in loan impairment is positive however, when compared to the previous 2 years, loan impairment reductions are slowing and reducing the benefit to the banks’ bottom line. Significant reductions in credit provision levels are unlikely in the future as the majors adjust to a more volatile economic environment," Ms Hinchliffe said.
"The four major banks will be focused on productivity and efficiency programs driven predominantly by technology enhancements. The majors are searching for new ways to reduce costs in a bid to make their organisations more efficient and agile, while delivering enhanced service to customers," Ms Hinchliffe said.
"On the regulatory front, Australia’s banks continue to increase their levels of capital and even more significantly, their holdings of low yielding liquid assets, in line with Basel III changes. They remain well positioned compared to global peers," Mr Dickinson added.