Australian banking environment: choppy water, with continuing swell
Thursday, 3 November 2011— EY has analysed the full-year results of Australia’s largest banks for 2011 and has found that while there is a continued robustness in the sector, earnings and revenue growth options are likely to become more challenging over the next 12 months.
EY’s Oceania Banking and Capital Markets Leader, Paul Siviour says:
“In this year’s reporting results Australian banks have again proven their ability to withstand the ebbs and flows of global volatility.
“Compared to overseas peers, Australian banks remain well capitalised and capable of riding out current economic uncertainty, however there will be some sizeable challenges to navigate in the coming months.
“Growth options in particular are likely to become very challenging as much of the low hanging fruit has already been picked,” Siviour said.
The full year bank results highlight several key issues, including:
- Limited potential for significant revenue growth over the short to medium term;
- Margins have largely remained intact, however the combined effects of global political uncertainty and related market volatility may drive higher wholesale funding costs. This risk is likely to continue for some time.
- Managing the post-GFC regulatory impost footprint and the costs associated with compliance;
- Greater focus on cost management disciplines with the search for sustainable cost reduction, including strategic targeted investment to re-tool, re-platform and enhance efficiency; and
- Broad asset quality improvements due to de-leveraging and lower credit utilisation along with relative provisioning levels, notwithstanding some continuing softness in certain sectors such as retail and property.
“In the race for competitive advantage it is critical to make the right investment bets at the right time given a benign credit environment and saturated local banking market,” Siviour said.
“Strategic investments are being pursued by all Australian banks in the search for growth in the ‘top line’. These strategies include efficiency agendas, multi brand distribution, channels/media and geographic expansion into higher growth markets. Such bets, executed well, will need to embed increasing regulatory expectations and demands.
“On a positive note, we are also seeing a shift in customer behaviour towards a savings bias and this has generated an unexpected funding benefit for the sector. Combined with last month’s introduction of covered bonds, this will provide some potential funding relief.
“Given the challenging market conditions, in 2012 Australian banks are likely to be re-visiting their strategic operating models, divesting non-core operations and focusing investment on areas where growth is a more certain and sustainable outcome.”
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