Accounting and financial services firm, KPMG says there could be more change ahead for the big four banks, whose collective 2015-16 profits fell 2.5% to a combined $29.6 billion – thanks to the sharp fall reported by the ANZ.
“It is inevitable that the majors will continue to refine their business models, being much more selective on which markets, products and customer segments to serve and those they may seek to pursue with a different approach – or exit altogether,” KPMG national head of banking Ian Pollari said in a statement issued yesterday with the bank’s second examination of the big four banks performance for 2015-16.
A combination of rising bad and doubtful debts changes, and higher liquidity and capital requirements hit the banks during the year forcing asset sales and tougher rules on home lending.
KPMG says these persistently challenging market conditions, rising regulatory capital, increasing loan impairments and margin compression are all combining to put downward pressure on industry returns.
Return on Equity fell by 194 basis points to an average ROE of 13.8% for the year, reflecting the impact of significantly increased regulatory capital requirements, but more importantly that outsized returns are not sustainable when interest rates and inflation are low and look remaining low for some time to come.
Westpac saw the light yesterday and lowered its target ROE from 15% to a range of 13% to 14% (its 2016 figure was 14%).
The banks” Common Equity Tier 1 (or CET1) average capital ratio rose by 28 basis points over the year to 9.9% of risk-weighted assets (RWAs), reflecting local regulator (APRA and the RBA) expectations for the major banks to achieve “unquestionably strong” capital levels, compared to their international banking peers.
The major’s net interest margins were squeezed further in the year by lower rates and higher funding costs – an old, old story. The average Net Interest Margin eased by 0.8 basis points compared to 2015 to 2.02% (on a 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 net interest income rose 5.5% in the year to September 30 to $60.3 billion in the year, while non-interest income fell 3.1%to $23.5 billion, mainly due to weaker wealth management and markets income, according to KPMG.
The banks’ average cost to income ratio increased by 116 basis points across the four majors to an average of 44.1% driven primarily by regulatory compliance obligations and the need to invest more in upgrading and strengthening their technology and digital capabilities.
The four major banks’ aggregate charge for bad and doubtful debts increased by $1.4 billion to $5.1 billion over the year (up 39 on 2014-15).
KMPG commented: “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.
And “Balance sheet momentum continues to slow, with housing credit growing by 4.2 percent and non-housing credit growth of 0.2 percent," KPMG added.
KPMG’s Mr Pollari said in yesterday’s release from the firm “Looking ahead, it is inevitable that the majors will continue to refine their business models, being much more selective on which markets, products and customer segments to serve and those they may seek to pursue with a different approach – or exit altogether.
“Effectively balancing the trade-offs between risk, capital and earnings growth will dictate future performance,” he added.
