Half-year bank results: Solid and stable but with lingering headwinds

Thursday, 5 May 2011 — Ernst & Young has analysed the half-year results of Australia’s largest banks for 2011 and sees that stability is returning to the economic environment, although there remains some caution around the pace of business credit growth.

Our analysis of the half-year results reveals that while banks are implementing different business strategies, they are all facing similar challenges, when compared to local and offshore peers:

• Good underlying performance from all Australian banks relative to global peers reflecting their ability to maintain a focus on the core customer elements of their strategies.
• There is limited potential to significantly grow local revenue in the short-term 
• Approaching the limit to which provision releases continue to contribute to improvements in earnings
• The banks’ current capacity to sustain increased dividends and payout ratios may be hampered by less vigorous growth opportunities, the extent of future capital requirements and the speed of offshore recovery influencing our economy.
• Ongoing funding pressures and increased competition, combined with a more cautious customer base is contributing to a greater internal emphasis on cost.
• Continued investment in targeted infrastructure projects, such as frontline and  core systems, channels and sales capability, to improve interaction and engagement with customers
• Significant  ongoing investment to comply with the regulatory change agenda.
• The strong results support continued organic capital creation narrowing the task that may be required under Basel III.
• In terms of liquidity, the ‘Australia’ problem, that is, a lack of supply side liquidity in the market, still presents a challenge.

Ernst & Young’s Oceania Leader of Banking and Capital Markets, Tim Coyne says:

“In this post- crisis environment, solid and stable results reflect a healthy and viable banking sector, which is vital to support the Australian economy, especially in the event of a future crisis. While our local sector is strong, the global picture is still evolving, particularly with the regulators looking to sure up the level of capital and liquidity in the banking system via G20 and Basel III.”

“In the retail market, customers are gaining confidence but there are some signs of increased arrears in the home lending space.  House affordability and valuation still remains a topic of interest to governments and regulators, along with the recovery process following the string of recent local natural disasters. Given this increase in arrears, concerns remain around the impact of further interest rate rises fuelled by the inflation pressures.”

 “With fewer single name, large exposures in the sector exhibiting stress, asset quality in the sector has improved over the last 12 months, contributing to a further reduction in credit provisioning charges in the period.  This improved quality will benefit underlying capital and earnings of the sector.”

“However, there still remains some softness in business lending demand as a result of operating in what is seen as a multiple speed economy.  This could be further impacted by a significant structural correction in the Australian dollar, emerging economic impact of the recent natural disasters on the region and sluggish growth in regional markets.”

“In terms of wealth management, sales and advice cross sell and penetration of bank customer bases has become an important avenue of future growth and diversification of income sources.  However, this continues to require ongoing investment in people, training and re-configuration of distribution footprints. These are essential investments as banks compete to deliver the broadest customer experience in a constantly changing market.”

“All banks are increasing their investment in technology and systems to improve their sales and distribution capability, operations and these broader strategic investments are reflected in their higher capitalised costs that will impact earnings and capital in the future.”

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Contact details:

Kate Hamilton
Ernst & Young Australia
+2 9248 5599 or +402 246 825