The Australian major banks (the majors) this FY15 reported another record earnings result, but return to shareholders is down as the banks face an accelerating pace of change and compounding challenges.
According to a new report issued today by KPMG Australia, major Australian Banks Full Year Results 2014-15, the majors delivered combined cash earnings of $30.0bn, up 5.4 percent from last year. Return on Equity, however, is down from 15.5 percent to 15.0 percent from the previous year. This downward trend is likely to continue as banks continue to increase their capital levels over the years ahead.
The banks’ record profits were achieved in the face of strong competition for new lending with net interest margins continuing to contract to a record low 2.02 percent, down from 2.07 percent last year.
“Revenue and margin headwinds, rising costs and capital levels, with a deteriorating credit quality outlook all mean the majors will face challenges in reversing declining returns in the years ahead,” said Andrew Dickinson, Asia Pacific Head of Banking for KPMG.
“Recent increases in home lending rates have shown that the banks do have some market power to improve margins. But careful balancing of shareholder and customer interests will be required in future to ensure disruptors are not further emboldened to attack established lenders’ business models,” he said.
The cost to income ratio decreased from 45.6 percent last year, to 45.3 percent this year, but banks need to fundamentally change their operating models to enable them to both enhance the customer experience, while at the same time, significantly reduce the banks’ cost base going forward.
“At the core of this will be the digital enablement of distribution channels, particularly branches which represent such a significant portion of the banks’ overall cost base. In addition, banks need to continue redesigning middle-and-back office processes and increase the use of outsourcing,” added Ian Pollari, Head of Banking, KPMG Australia.
The banks also face headwinds from increased charges for bad debts, up $363m to $3,764m this year.
“It is likely we have now seen the bottoming of the credit loss cycle, and the trend in lending losses is now on an upward trajectory,” said Mr Pollari.
Balancing the challenges of increased competition from disruptors, increasing lending losses, and a need to generate returns on ever more shareholder capital will provide a real conundrum for bank boards and management.
“Real courage will need to be shown by bank management over the next few years, and if banks push too hard on maintaining short term return to shareholders, they risk significantly damaging their long term franchise value and reputations,” commented Mr Dickinson.
“Longer term, we see customer behaviour and competitive dynamics continuing to rapidly evolve, driven by demographic changes, the digital revolution and the rise of fintech competition, presenting both threats and opportunities for the major banks.”
“In order to enhance their level of agility, the majors will need to intensify their efforts to simplify, standardise and automate their operating models, as well as preserve optionality in their strategies in order to capitalise on opportunities as they arise,” he concluded.
Head of Communications, KPMG Australia
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