The combined cash earnings of Australia’s big four banks dropped 5.5% to $29.49 billion for 2017-18, which was hardly the sort of damage that many eager beaver commentators had thought would flow from the Hayne royal commission and customer remediation costs.
According to an EY survey of the big four’s results (ANZ and NAB last week, Westpac yesterday and the Commonwealth Bank in August), the fall in cash earnings was due to slowing revenue growth and increased customer remediation and compliance costs.
But the reality is that the banks have survived a tough year in 2017-18 virtually unscathed, but with their reputations sullied for malpractice and dud management – the stench will linger for years.
And next year’s report of the bank’s full-year figures will be vastly different as their sales of key assets in insurance, funds management, and investor advice happen and capital profits booked, with most of that heading into boosting capital levels ahead of APRA’s10.5% minimum rule in 2020.
Only the ANZ is running a capital management program and is around two thirds as the way through a $3 billion buyback. the other three may have room for some sort of management plan deep into 2019.
The banks’ lower earnings have also flowed through to return on equity (RoE), which fell by an average of 170 basis points to still very solid 12.2%. Return on equity figures excluding the royal commission costs was higher though.
Banks’ profits and returns are increasingly being squeezed by a slowing housing market, reducing borrowing capacity, customer remediation programs, and higher costs.
Westpac’s cash profit was flat at $8.06 billion, ANZ’s profit dipped 5% to $6.49 billion, and the NAB revealed a 14.2% slide to $5.7 billion. In August the CBA said its full-year cash result fell 4.8% to $9.23 billion.
Only the CBA lifted dividend – up 2 cents a share to $4.31. The three other banks all maintained their payouts at 2016-17 levels $1.80 for the ANZ, $1.98 for the NAB and $1.88 for Westpac.
Net interest margin dipped 1.25 cent to 2.0 cents in every dollar and bad debt provisions fell 17.6% on average and proved the difference between the reported results and steeper falls in reported earnings.
“Australian banks are facing significant challenges, both financial and non-financial, with the Royal Commission, regulatory pressures and a rapidly evolving competitive environment all pointing to ongoing sector disruption,” says Tim Dring, EY Oceania Banking and Capital Markets Leader.
“The Financial Services Royal Commission has reinforced the growing trust deficit between the community and the banks.
“Reputations have taken a battering as more revelations of misconduct within the industry, including the prioritisation of profits over customer interests, have come to light.
“The past year has seen the banks making sizeable provisions for customer remediation programs. However, more provisions may be required and, as a result, profit growth may remain constrained in the near term.”
The banks have been revising lending policies to strengthen responsible lending standards.
“Tighter risk appetite is intensifying the competition for new low-risk owner-occupier borrowers while restricting loans to high debt-to-income customers,” says Dring.
