Adapting to a challenging environment: Major Banks Half-Year Analysis 2016-17

KPMG Major Australian Banks Half-Year Analysis 2016-17

KPMG finds that the Australian major banks (‘the majors’) continue to perform well and adapt their businesses, reporting an increase in aggregate profits for the first half of 2017. KPMG’s Major Australian Banks Half Year Analysis Report 2016-17 finds that the majors reported a cash profit after tax of $15.6 billion for the 2017 half year, up 6.2 percent (compared to the first half of 2016). The positive result was achieved in spite of the challenging environment of margin erosion and rising regulatory capital.

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KPMG finds that the Australian major banks (‘the majors’) continue to perform well and adapt their businesses, reporting an increase in aggregate profits for the first half of 2017. KPMG’s Major Australian Banks Half Year Analysis Report 2016-17 finds that the majors reported a cash profit after tax of $15.6 billion for the 2017 half year, up 6.2 percent (compared to the first half of 2016). The positive result was achieved in spite of the challenging environment of margin erosion and rising regulatory capital.

Ian Pollari, KPMG Australia’s Head of Banking commented: “In the face of increasing global geo-political uncertainty and subdued local market conditions, the majors continue to reshape their businesses in response to a complex operating environment. The biggest challenge for them will be identifying and executing against a set of opportunities to deliver future earnings growth at the same time as realising cost savings without jeopardising that growth.”

“Concerns around high levels of household debt and the housing market more generally have increased, however the overall credit environment remains broadly stable. There are no major surprises in the half year results - which is a positive for the majors,” Mr Pollari added.

The majors recorded flat net interest income of $30.2 billion in the first half, while non-interest income increased by 8.3 percent to $12.8 billion, mainly due to stronger markets income.

However, the majors were not able to preserve their margins in the first half, with heightened competition, higher wholesale funding costs and the prevailing low interest rate environment not sufficiently offset by mortgage re-pricing efforts. The major banks recorded an average net interest margin of 200 basis points (cash basis), down 3 basis point compared to the second half of 2016.

The major banks’ aggregate charge for bad and doubtful debts decreased $318 million to $2.2 billion in the first half (down 12.6 percent on 1H16). This is notable given deterioration in specific markets, such as Western Australia, where larger exposures to the mining sector and tougher economic conditions have weakened results.

Andrew Yates, KPMG Australia Partner, Financial Services said: “The low interest rate environment and the strengthening of housing lending standards over the past couple of years is expected to support future loan performance. However, continued discipline on pricing, debt serviceability and loan to value ratios will be important to ensure the major banks’ credit quality is maintained.”

The majors’ capital position continued to strengthen, with their average Common Equity Tier 1 (CET1) capital ratio rising by 16 basis points over the first half to 10.02 percent of risk-weighted assets (RWAs), reflecting the impact of increased regulatory capital requirements.

Mr Yates noted that in the first half, the majors’ returns on equity increased by 28 basis points to an average ROE of 13.9 percent, a good performance given ongoing pressure on capital. He expect, however, that any future regulatory measures calling for greater capital will continue to exert downward pressure on returns for the majors.

“While uncertainty surrounds the final destination of regulators on unquestionably strong regulatory capital levels, the majors’ management teams have done a commendable job of building their capital buffers over the past few years, which will need to continue,“ said Mr Yates.

“This is putting further pressure on the their ability to grow and will ultimately inform their strategic decision-making around what businesses they wish to remain in over the medium-to-longer term, as they continue exiting low growth, low return and capital intensive products and markets,” he added.

The average cost-to-income ratio decreased by 160 bps across the majors to an average of 43.4 percent.

Mr Pollari concluded: “Looking ahead, finding new ways to deliver highly personalised and relevant customer experiences through digital means will be a critical enabler of growth. In the short-term, performance will no doubt be driven be the effectiveness of the majors’ cost management, simplification and productivity measures. ”

“In the medium to long term, there are substantial opportunities for the banking industry to make its customer engagement and operating models more efficient through the application of enhanced process automation, machine learning and cognitive computing. The key will be augmenting this capability with a human element,” he added.

The full report will be available on the KPMG website later today.
 

Kristin Silva
Head of Communications, KPMG
T: 0411 110 953
E: ksilva@kpmg.com.au

Ashford Pritchard
T: 0411 020 680
E: apritchard1@kpmg.com.au

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