Australian banks keep the hatches battened down, but where to next?
Monday 5 November 2012 - Ernst & Young has analysed the 2012 full-year results of Australia’s largest banks and found the challenges around cost of funding and low levels of growth, which have been a flashing amber traffic light for the industry over the past 12 months, appear set to continue.
The broader economic psyche of the market is being shaped by the global economy continuing to oscillate between stability and shock, ongoing state of flux in Europe, post US election outcomes in relation to the fiscal cliff and political dynamics domestically.
Ernst & Young’s Oceania Banking and Capital Markets Leader, Paul Siviour said, “In the bank’s full-year reporting results we are seeing some of the vagaries of operating in different geographies and markets, with differing levels of confidence and risk appetite.
“The four major banks’ headline cash earnings of $25.2 billion in absolute terms (up 3.7% from 2011) clearly demonstrates the strength of Australia’s banking system. But within these results, a range of external factors highlight our reliance on the global recovery,” Siviour said.
“This is particularly evident in areas such as the cost of and access to wholesale funding, application of regulatory imposts and advocacy actions.
“So while the headline results show modest increases from the prior year, closer analysis reveals a mixed bag with the average cash earnings having fallen across the board in the second half of 2012, primarily due to tight margins and the low growth environment.”
The full-year bank results have also highlighted a number of key themes across the industry:
- Ongoing margin pressure and low balance sheet growth is driving banks to look for alternative options for growth.
- The results depict declining impaired assets levels, improved retail delinquency and strong provisioning coverage. However, there are signs of stress emerging in retail, commercial property, agribusiness and small to medium enterprises.
- Escalating regulatory costs, as a result of both global and local reforms and Basel III timelines, are providing the banks with challenges in meeting the required liquidity and leverage ratios over the next few years, particularly coupled with a finite and risk averse market.
- Increasing demands for greater transparency and clarity in interactions with customers, as the banks are challenged to pass on RBA interest rate cuts to meet consumer expectations.
- Funding and liquidity will remain a key focus for management in light of retail bond market developments, volatility in wholesale capital markets and uncertainty around the stickiness of customer deposits.
- Changing market composition with new entrants who are coming to the market with strong capital bases and deep deposit funded balance sheets. Japan and China in particular are starting to mobilise for greater presence in the Australian market on the back of further withdrawals from some of the European banks.
“Australian banks have really been focused on battening down the hatches in the current environment, with an increased focus on cost management and balancing current needs against future revenue development,” Siviour said.
“In our March 2012 results analysis, we pointed out that deposits had become the new black as the volatile global economic conditions increased competition for more diversified and cheaper funding options. Whilst this situation continues, we have now moved to ‘where to next?’
“Australian banks have been fortunate in capitalising on the search for safety from customers, resulting in higher savings deposits without the need to extend credit significantly.
“However, while Australian banks are generally financially healthy, particularly in comparison with some of their global peers, the past is no guarantee of future success,” Siviour said.
“Against a background of continuing pessimism in the global market and with new entrants to the local market, it will be more vital than ever for Australian banks to understand their customers and develop customer-centric models, supported by effective and efficient infrastructure.
“Growth is going to need to come from focusing on customers and fundamentally understanding which services to deliver and how to deliver them effectively, staying focused on emerging markets and continuing to adapt business models.
“In an environment of low growth and cost consciousness, banks are tempted to delay investment in projects that do not generate short term paybacks. This could endanger their ability to position for future opportunity and longer term growth prospects.”
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