KPMG’s Major Australian Banks Half Year 2012 report shows that the majors have posted a healthy profit for the 2011-2012 half year but lack of growth will be a focus for investors. The majors’ cash profit was, after tax, $12.6 billion for the 2011-2012 half year up 2.4 percent from the second half of last year’s cash profit of $12.3 billion.
The increase in profit reflects Australia and the Asia Pacific’s continued economic strength.
"The major banks’ profit clearly shows we have a strong banking system, however it must be viewed in light of the increased capital that the banks now need to hold. Return on equity (ROE) remains around 16 percent for most banks and shareholders will need to accept that this level of return is all they can expect for the foreseeable future,” said KPMG’s head of banking, Andrew Dickinson.
Statutory profit before tax was $16.8 billion for 2011-2012 half year compared to $16.3 billion in the second half of 2011. Andrew Dickinson said: "The banks’ biggest challenge is adapting their business model to cope with the competing strains of constrained lending growth, ongoing funding pressure, ever higher regulatory hurdles, and a transition to new mobile delivery channels and competitors."
The high cost of funding remains a challenge for the majors, impacting on margins, which narrowed from an average of 229 basis points in H2 2011 to 221 basis points in H1 2012. Cost to income ratios have improved slightly at an average of 44.7 percent in H2 2012, compared to 45.2 percent in H1 2011.
"Sustainable cost reduction remains a challenge for the major banks. While they are implementing a number of cost reduction measures, the full impacts are yet to flow through to the results. They need to make structural, long term changes that will sustain a lower cost base," said Michelle Hinchliffe, KPMG’s Head of Financial Services.
The ROE for the majors is an average of 16.3 percent compared with 16.6 percent half year 2011. "Increased capital requirements from Basel III will continue, and while managing margin pressure remains important, containing costs while improving customer relationships will also feature highly in the majors’ strategy," Ms Hinchliffe added.
Asset quality improved this half year, as impaired loans as a percentage of total loans continued to decrease, reflecting improved economic conditions.
Wealth management cash profits were impacted by subdued equity markets and cautious investors, declining 3.7 percent to $1.03 billion in H1 2102 compared with $1.07 billion in the last half year.
"Banks are refocusing on their business models in wealth management, in order to gain share and achieve efficiencies in what is one of the largest and fastest growing wealth management industries in the world," said Ms Hinchliffe.
The outlook for Australia’s major banks for the next half year will be impacted by economic uncertainty in global markets. Bank funding conditions have continued to be tough, and Australia’s banks, while some of the healthiest and best run in the world, will continue to be impacted by the cost of funding.
"The global crisis in access to funding has forced the majors 'back to the past' where they are wooing domestic deposits to boost their funding. This means deposit competition is intense, and depositors are now being paid 2 percent more (relative to RBA rates) than before the GFC. It is these increased deposit rates which are now having the strongest impact on bank funding costs." Andrew Dickinson said.
"Australian banks are well capitalised, continue to maintain strong liquidity positions and are well placed to respond to new global capital and liquidity rules," Ms Hinchliffe said.