Australia’s big four banks survived 202021 and ended it in good condition, once again proving that you can’t kill them – not with the first pandemic of Covid, fintech-driven competition, silly behaviour to customers by themselves, money laundering breaches, the fallout from the Hayne Royal Commission and a second bout of Covid – this time the Delta variant.
In fact, Tuesday’s solid full year result from the National Australia bank concluded the strong recovery the big four have made from the pandemic damaged 2020 financial year.
The Commonwealth, NAB and ANZ all did well, producing big results and higher dividends, but Westpac was the laggard.
All four announced share buybacks (along with the smaller Suncorp)
The big four reported aggregate earnings up 55% to $26.76 billion from $17.31 billion in 2019-20.
The result was driven by strong housing market activity, better-than-expected impairment outcomes that enabled the release of pandemic-driven provisions, and fewer notable expenses.
Average return on equity (ROE) rose to 9.9%, from a depressed 6.6 %, boosted by share buybacks undertaken by some of the banks.
Net interest margin fell three points to 1.88% in the year.
The average payout ratio for the big four for the year to September was 70.01% (on a cash earnings basis). Westpac had the highest payout ratio at 80.88% (and the least convincing of the results), CBA was next with 70.44% (which was actually down from the 71.22% in the year to June 30, 2020.
That’s because the CBA only experienced three months (June, 2020 quarter) of the impact of the first wave of Covid, while the three others saw a six-month whack.
The NAB’s payout ratio was 63.70% and the ANZ’s was 64.90%. Both (along with Westpac’s) payout ratios were up from just over 40% in 2019-20.
But accounting group, EY said in its analysis that the banks’ underlying earnings remained under pressure in 2020-21.
“Revenue growth was subdued and costs remained elevated, reflecting ongoing remediation, compliance and digitisation programs. Interest margin declined, driven by low interest rates, asset mix and intense mortgage competition. Funding tailwinds are starting to fade with the final draw down of the central bank’s Term Funding Facility (TFF).”
“Asset quality remains benign. While the full impact of extended lockdowns in Sydney and Melbourne is yet to play out, impairment risk should decline as businesses reopen, border restrictions ease and the economy recovers. Notable is the low level of loans subject to repayment deferral relative to previous lockdowns” EY predicted.
EY pointed out there were several benefits to emerge from the lockdowns.
“The pandemic has presented a unique opportunity for the banks to speed up their transformation journey and cultivate the innovation required to remain competitive against nimbler brands.
“Among the banks’ immediate priorities are continuing simplification and digitisation strategies to boost efficiency. At the same time, they must also improve customer experience in the face of increasing competition from fintechs and bigtechs who are disrupting financial services.
“This is especially evident in payments, where the rapid expansion of ‘buy now, pay later’ (BNPL) options are prompting the banks to invest in BNPL providers or develop their own BNPL solutions.
“Climate change risks are also front of mind in the wake of COP26 and the Federal Government’s recent commitment to a target of Net Zero by 2050, particularly as the major banks participate in APRA’s first climate vulnerability assessment exercise.”
And all banks face a rise in funding costs in the next two years as the refinance the borrowings from the Reserve Bank under the Term Funding facility which provided three-year money at 0.10%. That in turn will see rises in interest costs for many borrowers.
As well the Committed Liquidity facility, which has supported the capital buffers of the banks is going to be phased out soon because the Federal and State Governments have issued more than enough bonds in the pandemic to fund their spending and support plans.
EY said this will see a rise in competition for deposits is also likely to intensify as elevated liquidity positions subside and depositors find other uses for the money presently left with the banks.
