The race for growth

EY’s analysis of the Australian major banks’ 2014 half year results

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Thursday 8 May 2014 — Whether you compare Australian or global banks, the key question that continues to emerge is where is the growth going to come from – will it emerge from retail, business or institutional markets or, more broadly, from Asia?

EY’s analysis of the half year results of Australia’s big four banks shows they continue to perform reasonably well, with headline cash earnings for the period at $14.7 billion – an increase of 10% from the $13.4 billion 2013 half year results. This has been largely driven by some growth in retail markets and trade activity, lower provisioning charges and circumspect cost management.

Competition is proving fierce in the retail mortgage segment, fuelled by a stronger property market. As a result, margins are weaker than in prior periods. Corporate and business lending remains subdued, with some uptick in growth expected in the second half of the year. The market is eagerly awaiting the outcome of next week’s Federal Budget.

The banks’ wealth businesses have benefited from improved funds inflows and equity markets, but results have been tempered by higher disability claims and life insurance lapses.

EY’s Oceania Banking and Capital Markets Leader, Paul Siviour said: “In recent years, the Australian banking sector has had to manage cost bases in light of low levels of confidence and challenging growth.”

“At the same time, the banks have been improving asset quality, strengthening capital resilience and capacity, and continue to invest in their systems and customer experience,” Siviour said.

“On balance the half year results demonstrate a solid performance, at or slightly above consensus estimates. There are increasing signs that we may be at the bottom of the credit cycle, with historically low loan loss levels and confidence beginning to creep back into the market. What remains to be seen is where the opportunities will emerge and who will be best placed to benefit.”

Focus areas for growth

Sivour said that, in the race for growth, the Australian banks will be keeping a close eye on a number of key areas – most notably customer focus, superannuation and wealth, and Asia.

“Consumer behaviours are changing as Australian customers increasingly look to interact with their bank through digital, mobile and social media channels. To be effective, banks need to remove traditional business unit and channel silos and create a more seamless customer experience across the entire organisation. Agility and innovation will need to be balanced to ensure that the growth in data, interactions, offers and new delivery methods is not increasing risk.”

“In the wealth space, current proposed changes to the FOFA reforms and the ability (or not) for banks to be able to provide default superannuation arrangements under employment awards could have major implications.”

“Asia is also of interest, with the region viewed as an opportunity in an otherwise flat growth environment. Each of the banks has a different Asian expansion strategy, but trade flow is a key target,” Siviour said.

The economic, political and regulatory backdrop

“Arguably, our financial services system is facing an unprecedented level of potential policy and structural change,” Siviour said.

“The Financial System Inquiry (FSI) called for initial submissions by 31 March 2014. Over 270 submissions were received from a wide range of industry participants, industry bodies, regulators, academics, consumer groups and individuals. The major banks have actively participated in the FSI, including lodging submissions.”

“The release of the National Commission of Audit report last week and the pending first budget announcement of the Abbott Government have already created significant debate. The past year has also seen increasing State Government interest in recycling capital through the sale of assets to fund necessary infrastructure projects. This presents both opportunities and challenges for the debt and equity capital markets.”

“Regulators continue to focus on conduct in the banking sector, both locally and globally. This is fundamentally changing the design and sale of products and services and is challenging banks to re-orient their organisations with an emphasis on core values and behaviour. Locally, we are also seeing a renewed focus from APRA on stress testing. APRA can be expected to conduct ad-hoc entity wide stress testing focusing on particular areas of concern, most recently mortgage portfolios.”

The race ahead

“Customers are changing, their preferences are changing and their expectations are changing. Meanwhile, the influence of Government and public policy is significant. Structural changes are likely to impact superannuation, retirement incomes, financial advice needs, aged care, health, infrastructure development and government ownership of certain assets and businesses.”

Sivour concludes: “In this environment, the major banks will need to continue the push for simplification, increase the use and functionality of their digital distribution, mobile and social media channels, and place a greater emphasis on customer insight and experience. They will also need to focus on expansion into broader opportunities, including Asia, while maintaining a spotlight on the regulatory agenda.”

Australian major banks’ 2014 half year results at a glance

  • $14.7 billion in cash earnings up from $13.4 billion in the 2013 half year results, an increase of 10%
  • Net interest margins down an average of 6 basis points from the prior comparative period, to 2.08%
  • Overall reduction in total net provisions of $1 billion from the prior comparative period, to $17.3 billion
  • Return on equity improves by an average of 30 basis points from the prior comparative period, to 16.3%
  • Dividend payout ratios have decreased by an average of 6 basis points from the prior comparative period

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Contact details:

Rebecca Aley
Ernst & Young Australia
Tel: +61 2 9276 9305 or +61 418 835 849