Australia’s major banks reported a cash profit after tax of $31.5 billion for the 2017 full year, up 6.4 percent (compared to 2016). Against a backdrop of subdued economic growth, slowing demand for credit, continued margin pressure and high regulatory and capital costs, the majors have been adept at managing a number of headwinds to deliver a solid result for the full year.
Key components of the results are:
- Return on equity was relatively flat on 2016, increasing 15 basis points to an average ROE of 13.9 percent for the full year, as the increase in banks’ capital levels in response to capital requirements has continued to compress industry returns.
- Common Equity Tier 1 (CET1) average capital ratio rose by 46 basis points over the full year to an average of 10.3 percent of risk-weighted assets (RWAs), reflecting the impact of increased regulatory capital requirements.
- Net interest margins are down by 5 basis points compared to 2016 to 201 basis points (cash basis), as the majors continue to face margin pressure, with heightened competition, higher funding costs and the prevailing low interest rate environment not sufficiently offsetting mortgage re-pricing efforts.
- The average cost-to-income ratio decreased by 103 bps across the majors to an average of 43.4 percent, with revenue growth moderating compared to the increase recorded in underlying operating expenses. The rise in expenses can be directly attributed to meeting high and rising regulatory compliance, legal and remediation requirements, as well as restructuring costs and investment in technology.
- The major banks’ aggregate charge for bad and doubtful debts decreased $1.2 billion to $4.0 billion for the full year (down 22.5 percent on 2016), demonstrating their ability to preserve credit quality in a challenging growth environment. As interest rates inevitably rise, they will need to balance their pursuit of future volume growth, with profitability and a strong focus on pricing discipline.
- Modest balance sheet momentum, with housing credit growing by 5.3 percent and non-housing credit growing by 0.1 percent in the full year. The majors recorded net interest income growth, increasing by 1.7 percent to $61.3 billion in the year, while non-interest income also increased, by 3.8 percent to $24.6 billion, mainly due to improved market conditions and one-off asset disposals.
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