Westpac’s interim results yesterday capped the half way point of the Big Four’s 2022-23 financial year with combined statutory earnings up nearly 11% to $16.77 billion.
Westpac did best with a 22% jump in statutory profit, NAB’s was up 14.8%, ANZ, up 12% and the Commonwealth reported a 10% rise for its half year to the end of December, 2022.
Westpac abandoned the cash earnings measure and returned to after tax profit or statutory profit, the three others used both measures but emphasised the cash figure.
Australia’s systemically important banks showed they were very profitable and very strong despite all those rate rises from the Reserve Bank -10 in all up to the end of March.
For that they (and the Australian federal budget tonight) can thank the still strong labour market and near record low unemployment – even if real wages continue falling and household income and spending slows, and shifts towards essentials and away from goods.
That strong jobs market has helped soften the blow from still too high inflation and analysts say those cost pressures and the cumulative impact of the now 11 rate rises, and perhaps 12 (with another in the offing) could be the headwinds the earnings lines of all banks find hard to resist over the next year or so.
The CBA will balance first at the end of June and the NAB, ANZ and Westpac all balance on September 30 and their earnings and second half dividends will be exposed for longer to a slowing economy.
Net interest margin rose 17 points between the four to 1.88% and return on equity was up to 12.6%, up 191 points. The average cost to income ratio fell from 49.3% in the first half of 2021-22 to 44.3% in the latest period.
Operating expenses increased by 2.6% compared with a year ago reflecting an increase in personnel costs and investment spend, although offset by lower remediation costs from the Royal Commission.
Interim dividend payments across the Big Four increased in in the first half of 2022-23 with the average amount per share rising by 16.5% to 111 cents per share compared to the same half of 2021-22. The average interim dividend payout ratio dipped by 8 basis points from to 65.2%.
EY said impairments totalled $1.44 billion, up $1.66 billion in total.
It must be said that three months on from the CBA’s interim figures release, the commentaries and outlook analysis from the NAB, ANZ and Westpac were all more circumspect and not as encouraging as that from the country’s biggest bank back in February.
Only the Commonwealth announced a buyback – $1 billion with its results in February and there wasn’t a hint of capital management from the other trio in their interim commentaries in the past week.
Ernest & Young (EY) said in its analysis of the interim results that asset quality deterioration “is a real risk as higher interest rates and inflation squeeze household finances and businesses grapple with higher input and labour costs.”
“Banks must also manage the flow-on risk management consequences of the global banking industry disruption.
“On the economic front, further change and complexity lie ahead. The Reserve Bank has increased the cash rate 11 times since May 2022 and the central bank board has noted that some further tightening of monetary policy may be required.
“With inflation still uncomfortably high, a resilient labour market and business conditions sitting above pre COVID-19 levels, additional monetary tightening is possible.
“Internationally, the sector held its breath as overseas bank failures unfolded at speed. Impacts to Australia’s financial system were relatively mild. But history tells us that tightening cycles tend to flush out hidden weaknesses in the financial system. We don’t yet know the full consequences of the current monetary tightening.
“Given the deposit outflows that led to the failed US banks, Australian banks are taking a more granular look at their deposit mix, including the proportion of insured to uninsured deposits. Also, while the fallout for Australia’s broader financial system has not been significant, the impact on funding markets will weigh on the banks’ funding costs.
“Against this uncertain and volatile backdrop, the banks must undertake a complex high-wire balancing act. When making decisions about profitability, they must safely traverse across competing demands from investors, customers, regulators and government.”
EY warned that the NIMs for the big four face pressure: “Average NIM has improved, underpinned by interest rate rises and careful management of mortgage versus deposit rate increases. As ongoing competition erodes the margin benefits of higher rates, we are likely to see margins tighten as early as the second half of 2023.”
“Signs of stress are emerging following the rate rises, with arrears ticking up. However, NPLs (non-performing loans) remain low. The labour market has remained more resilient than expected, with low unemployment a key contributor in keeping bad loans at bay.
“Despite market speculation of a pending ‘mortgage cliff’, the banks are not anticipating a sudden wave of home loan defaults. However, they remain cautious in their outlook, especially given the current market uncertainty. All have increased their collective provisioning levels compared with 2H22.”
In its report yesterday, KPMG pointed out that while the headline results for the period were positive for the big banks, “there are early signs of stress in the loan portfolio as a result of the soft economic outlook.”
“With interest rates elevated, the Majors are seeing a margin benefit, but this is being eroded by a combination of loan pricing competition, funding cost increases and a continued rise in bank costs,” KPMG said.
“We expect that arrears and impairments will start to accelerate over the second half of the year with mortgage arrears following the lead of unsecured products,” according to KMPG’s Partner, Credit Risk Management, Paul Lichtenstein.
