Strong performance from the banks, but where to from here?

EY’s 2013 half-year Australian banks’ results analysis

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Thursday 9 May 2013 — The results announcements of Australia’s major banks show a solid $13.4 billion in cash earnings generated for the first half of the year, as they continue to adapt to lower revenue growth, subdued confidence and stricter regulatory requirements.

EY’s analysis of the 2013 half-year results of the big four banks shows strong cash earnings, despite lower level revenue growth. Overall, cash earnings are up 7.3% from the same period last year, reflecting modest net income growth, continued growth in other income, substantially flat or reduced operating expenses and a small reduction in provisioning costs.

EY’s Oceania Banking and Capital Markets Leader, Paul Siviour said, “While the major Australian banks have posted another strong result, the question remains, where to from here?"

“Ongoing pressure on net interest margins, alongside limited credit growth, has driven a focus on cost management and productivity resulting in jaws being positive across the board for the first time since half-year 2011,” Siviour said.

“The RBA’s surprise interest rate cut on 7 May was clearly targeted at relieving the pressure of the high Australian dollar and other signs of a tentative economy.

“In this environment, balancing cost, innovation and regulatory changes are the immediate challenges for Australian banks. For the remainder of 2013, they will need to continue to focus on improving productivity and product innovation, while progressing technology projects and continuing to closely manage their cost bases.

“Over the longer term, the quest for future growth opportunities will require banks to form strategic partnerships in Asian markets, digitise payments and channels to generate deeper customer engagement, and simplify products and processes.

“The banks are shifting from a primarily product driven approach to more customer centric models. Each of the major players has undertaken significant projects to align infrastructure and operating systems, innovate through new channels, and drive productivity improvements in sales and distribution.

“While partially cost management initiatives, ultimately these moves are designed to improve customer experience and engagement,” Siviour said.

“Technology remains an important aspect of the strategy for each of the major banks, with a particular focus on improving online and mobile banking platforms. Australia has one of the highest levels of smartphone penetration in the world and customers are expecting more from their digital wallet solutions.

“The challenge now is for banks to find the funds to invest in further product, service and system innovation in a low growth environment. The capitalisation of these technology project costs and future amortisation will have an impact on earnings and efficiency outcomes in future years.”

Banks are also continuing to face a range of global and local regulatory reforms – including Basel III, FATCA, Dodd Frank, and the Financial Claims Scheme – which will result in increased compliance and implementation costs for some time to come.

“An example of this is the Basel III liquidity proposals released by APRA earlier this week. APRA has maintained their tough stance on the implementation timeline (with no transition) so banks now need to progress restructuring of their funding portfolios towards longer term wholesale funding and stable retail deposits to meet the net stable funding ratio in 2018 and the changes to holding high quality liquid assets under systemic stress scenarios for the purposes of the liquidity coverage ratio in 2015,” Siviour said.

“Many of these regulatory demands require structural or operating model adjustments as well as changes to existing business processes. This creates a significant change management challenge and banks will need to embrace the changes and look for opportunities to derive business benefits where possible.”

2013 half-year Australian major banking sector results at a glance

  • $13.4 billion in cash earnings, representing an overall increase of 7.3% on the prior comparative period
  • Net interest margins down by an average of 6 basis-points from last half, to 2.1%
  • An average of 7% improvement in cost to income ratios across the board
  • Overall reduction in gross impaired assets from $20.3 billion to $17.8 billion
  • Increase in risk weighted asset ratio to 97.2%
  • Return on equity remains flat at an average of 16.1%
  • Dividend payout ratios have increased by an average 2.9%

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Contact details:

Rebecca Aley
EY Australia
Tel: +61 2 9276 9305 or 0418 835 849