Australian major banks’ half year results 2017

Solid results in an environment of heightened uncertainty

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ANZ, NAB and Westpac’s half year reporting periods ended on 31 March 2017. CBA’s half year reporting period ended on 31 December 2016.

Note: Figures throughout this report are calculated on the prior corresponding period unless otherwise stated.

Unless otherwise specified, references to the banks refer to the ‘big four’ Australian banks:

EY bank analysis

ANZ, CBA, NAB and Westpac

Underlying cash earnings: $15.6bn increase of 6.25% (total of all four banks)

Average return on equity: 13.9% increase of 8 basis points

Net interest margin: 2.00% decrease of 7 basis points

Bad debt expense:  Decrease of 12.3%

The banks have again delivered a solid set of results for the first half 2017, despite continuing to operate in an environment that is increasingly characterised by growth constraints, intense competition, political scrutiny, increasing regulation and heightened economic uncertainty.
These factors add to a challenging operating environment for the banks, fuelled by:

  • Housing affordability challenges, particularly in Melbourne and Sydney
  • High household debt
  • Lack of investment by the private sector
  • Low wage growth
  • The threat of sovereign and bank credit ratings downgrades
  • Potential volatility in wholesale funding costs due to lingering offshore geopolitical uncertainties

Cash profit improved from write-downs in first half 2016 and continued low credit losses. While return on equity (ROE) improved on an average basis across the four banks, it declined for most at an individual results level. Repricing assisted in containing net interest margin (NIM) declines.

Out-of-cycle rate increases in the banks’ mortgage books have generally supported margins, but will have a more significant impact on future results. Looking ahead, we will see regulatory, government and public pressure mounting to curtail house price growth, particularly in Melbourne and Sydney. Under these conditions, the banks’ ability to extract additional margin through differential rate rises on residential investment property lending, interest-only owner occupier mortgages and fixed rate mortgages remains a balancing act. Rate increases will benefit the banks’ earnings, but they also have the potential to place additional pressure on a highly indebted household sector.

As the banks continue to reshape their businesses in the ‘new normal’ lower growth environment, they are focused on a number of broad strategic areas:

  • Grow developing strategies for sustainable and profitable growth
  • Optimise restructuring the balance sheet and using technology to improve service and reduce cost
  • Control managing risk and regulatory compliance
  • Protect rebuilding trust

Executing well in each of these areas will require the banks to manage the tension inherent in two very different agendas. On the one hand, grow and optimise: the need to improve financial performance against a challenging backdrop. On the other, control and protect: the need to keep the bank safe.