Press release

7 Nov. 2019 , 11:30 Melbourne, AU

The big squeeze: banks’ margins, profits and returns under heavy pressure

EY analysis of the 2019 full year results of Australia’s major banks

  • $26.9 billion in combined cash earnings, down $2.3 billion from the 2018 full year results, a decrease of 7.8%.
  • Return on equity decreased by an average of 125 basis points from the prior comparative period, to 10.9%.
  • Average net interest margins decreased by an average of 9 basis points from the 2018 full year results, to 1.94%.
  • Total customer remediation costs of $5.7 billion before tax, up $2.7 billion from the 2018 full year.

The full year results of Australia’s big four banks reflect an extremely challenging twelve months for the local banking sector, with combined headline cash earnings dropping down to $26.9 billion after tax – a decrease of 7.8% from the same period last year.

EY Oceania Banking and Capital Markets Leader, Tim Dring said, “There’s no doubt that 2019 has been a tough year for Australia’s major banks and the storm clouds show no signs of abating. Declining profits and margins have seen the banks cut dividends and preserve capital, as they batten down the hatches and brace for further challenging conditions ahead.”

According to EY analysis of the major banks’ 2019 full year results, net interest margins (NIM) have fallen by an average of 9 basis points from the prior comparative period, largely driven by intense pricing competition. Lower earnings and higher capital requirements have also flowed through to the banks’ return on equity (RoE), which has continued its downward trend by an average of 125 basis points, to 10.9%.

“Uncertainty in global markets, a slowing local economy and ultra-low interest rate environment, increasing consumer and regulatory pressures, heightened competition and significant remediation costs are all putting pressure on the banks’ performance,” Mr Dring said.

“With the global economy largely stuck in neutral and subdued consumer and business confidence constraining inflation and wage growth, pressure will be placed on unemployment rates, loan arrears and asset values.”

“For now, asset quality remains strong but benign credit conditions will not continue indefinitely and, when the credit cycle turns, that will squeeze the banks’ future profits even further.”

“The banks are also facing additional headwinds in the form of elevated risk and compliance investment requirements and the need for additional remediation provisions.”

Credit growth remains subdued

“Growth in the critical home lending segment remained subdued during 2019, with tighter lending standards appearing to be the new world order. While there have been early signs of turnaround – with some markets showing an increase in loan applications and approvals in recent month – declining market share and a squeeze on margins as interest rates fall point to continuing housing credit growth challenges for the major banks,” Mr Dring said.

“Pricing in the front versus the back book is under scrutiny too, with banks under pressure to close the gap. Banks have traditionally benefited from higher margins in their back books, while offering heavy discounts form new borrowers. However, the government has recently directed the ACCC to investigate the banks failure to pass on official rate cuts in full, and margins will face further compression if this gap is narrowed or closed.”

“In the personal credit lending space, the banks are already facing greater competition in the consumer loans market as the popularity of buy-now-pay-later service providers increases. And we can expect to see further disruption in this area over the next few years, as the rollout of open banking and changes to consumer data rights make it easier for customers to switch products and providers.”

“Aggregate business lending has increased, although results vary across the individual banks.  Across the wider banking sector, growth continues to be driven by lending to large corporates, with small business lending remaining relatively flat.”

Rebuilding trust in the sector

“In the current environment, bank performance is no longer purely about financial results – it’s also about rebuilding trust,” Mr Dring said.

“Post the Royal Commission, and even before, the major banks have really accelerated their efforts to enhance accountability and improve risk culture. Systematically incorporating non-financial risk and performance into their reporting will be a critical part of this, requiring significant investment in defining, measuring and tracking these. How boards respond will also be a key part of rebuilding confidence and trust in the sector, and we are likely to see closer links between non-financial performance outcomes and remuneration, including long-term incentives.”

“Another key challenge for the banks is the operational side of their remediation program. Identifying the provision is one thing, but actually getting the cash back in the hands of the customer represents a significant task for the banks – one that needs to be handled quickly and efficiently.”

Where to from here?

“There is a seismic shift occurring in consumer preferences, economic trends and regulatory environment. Coupled with increasing pressure from new non-traditional players, like neo banks, payment service providers and technology companies, these changes mean that banks will have to make some tough choices in order to remain relevant and rebuild trust.”

“With the rapidly approaching introduction of open banking, the next few years will usher in changes that will fundamentally shift the Australian financial services landscape. Banks should be considering a shift to more transparent strategies that focus on promoting customers’ financial wellbeing and moving away from product-centric selling models towards ones that offers more customer-centric, personalised subscription-based services,” Mr Dring said.

Find out more here.



Rebecca Aley
Ernst & Young Australia
+61 418 835 849


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