Australia’s major banks reported a cash profit after tax of $29.6 billion for the 2016 full year, down 2.5 percent compared to 2015, in the face of rising bad and doubtful debts changes, and higher liquidity and capital requirements. Persistently challenging market conditions, rising regulatory capital, increasing loan impairments and margin compression are all combining to put downward pressure on industry returns.
Key components of the results are:
- Return on Equity has fallen by 194 basis points to an average ROE of 13.8 percent for the year, reflecting the impact of significantly increased regulatory capital requirements.
- Common Equity Tier 1 (CET1) average capital ratio rose by 28 basis points over the year to 9.9 percent of risk-weighted assets (RWAs), reflecting local regulator expectations for the majors to achieve “unquestionably strong” capital levels, compared to international bank peers.
- Net interest margins are down by 0.8 basis points compared to 2015 to 2.02 percent (cash basis), as the majors have found it increasingly difficult to preserve their margins through mortgage re-pricing, offset by higher wholesale funding costs, holdings of liquid assets and a falling interest rate environment.
- The average cost to income ratio increased by 116 basis points across the majors to an average of 44.1 percent, driven primarily by regulatory compliance obligations and the need to enhance their technology and digital capabilities.
- The major banks’ aggregate charge for bad and doubtful debts increased by $1.4 billion to $5.1 billion over the year (up 39 percent on FY15). While asset quality has broadly remained sound for the majors, rising loan impairments have continued to increase and are most prominent in sectors exposed to the resources and manufacturing industries.
- Balance sheet momentum continues to slow, with housing credit growing by 4.2 percent and non-housing credit growth of 0.2 percent.
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