Australian banking environment:
the rise of the deposit
Thursday 10 May 2012 — In a fortunate turn of events for the banking industry, it seems deposits have become ‘the new black’, as challenging global economic conditions increase competition for more diversified and cheaper funding options.
EY has analysed the 2012 half-year results of Australia’s largest banks and found that deposits are now the battleground for stability and maintaining margins.
EY’s Oceania Banking and Capital Markets Leader, Paul Siviour says:
“In this year’s half-year reporting results we have seen a significant shift in both consumer and banker psyche, with the humble deposit, once a cheap, discounted source of funding to the cash rate, becoming the ‘holy grail’ during a period of continuing volatility. However this comes at a price.
“Further complicating the shift in funding, is the customer perception of large profits being made at their expense. Clarifying this is a tough message for banks to sell in a volatile and disenfranchised post-GFC economy.
“One of the clear learnings from the GFC is that a strong and robust banking sector is crucial to maintain an economy that can withstand turbulence in the global markets. It’s also important to remember that a bank’s profits are re-invested into superannuation and the broader Australian economy,” Siviour said.
The half year bank results highlight a number of key issues, including:
- Rising wholesale funding costs as volatility among both domestic and offshore economic indicators continues to influence the broader market and pricing of capital
- Increasing focus on cost reduction and efficiency of internal processes
- A saturated Australian market placing continued pressure on a bank’s domestic net interest margins from both sides of the balance sheet
- Improving asset quality is evident along with some utilisation of management overlays for specific events; provisioning coverage remains prudent
- Pressure to comply with an increasingly crowded regulatory landscape (including Basel III capital, liquidity, superannuation trustee, tax and other requirements)
- De-coupling of pricing decisions from the RBA cash rate continues to draw attention and challenge the banks to bridge the gap of consumer perceptions and expectations.
“The average increase in cash earnings over the first half of the year indicates solid performance by the major banks and highlights their ability to adapt to change amid ongoing volatile market conditions,” Siviour said.
“However, elevated funding costs and low levels of credit growth have put significant pressure on the profitability of their core business. Combined with sub-trend economic growth and a downfall in sentiment, the major banks are facing ongoing challenges in generating sustainable profits. This is driving an increased focus on cost control and expense management.
“Strategically, the interesting issue to play out in the sector over the next few years will be determining what the future of banking in Australia will look like,” Siviour said.
“While Australian banks are financially well-positioned to meet the challenges of the current environment, the future of banking will require a shift in mindset to better address customer needs and preferences. Linked to this will be the need to focus on tailored customer value propositions and more modular distribution and engagement models.
“Understanding changing customer segments and behaviours is crucial to delivering products and services for the future, and those banks who are best able to adapt to a changing customer landscape will be able to gain competitive advantage.”
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