Press release

9 Nov. 2021 Sydney, AU

Banks’ earnings rebound, but revenue and profitability remain under pressure

Australia's big four banks have delivered significantly improved headline earnings in their 2021 full year results, but underlying pressures remain with subdued revenue growth, low interest rates and intense mortgage competition all having an impact, according to Ernst & Young Australia (EY Australia).

Related topics Economics

EY analysis of the 2021 full year results of Australia’s major banks

  • $26.8 billion in combined headline cash earnings across the four major banks, up $9.5 billion from the 2020 full year results, an increase of 55%
  • Return on equity across the big four banks increased by an average of 330 basis points from the 2020 full year, to 9.9%
  • Average net interest margins decreased 3 basis points from the prior comparative period, to 1.86%
  • Credit impairment charges decreased 107% from the prior comparative period, to a write-back of $0.8 billion

Australia's big four banks have delivered significantly improved headline earnings in their 2021 full year results, but underlying pressures remain with subdued revenue growth, low interest rates and intense mortgage competition all having an impact, according to Ernst & Young Australia (EY Australia).

EY Australia’s analysis of the Australian major banks’ 2021 full year results found aggregate cash earnings were up 55% from the same time last year, to $26.8 billion, underpinned by strong housing market activity, better-than-expected impairment outcomes that enabled the release of pandemic-driven provisions, and fewer notable expenses. However, revenues and profitability remain under pressure. Net interest margins declined 3 basis points on the prior comparative period and funding tailwinds have begun to fade, with the final draw down of the central banks’ term funding facility. In this environment, fixed mortgage rates are on the rise as the banks look to sustain margins.

EY Region Banking and Capital Markets Leader, Oceania, Tim Dring said: “Across the big four banks, key measures of asset quality remain resilient, with bad debt charges lower due to provision releases and low levels of write-offs.”

“While deferrals remain significantly lower than they were at the height of the COVID-19 crisis in mid-2020, the banks will need to keep a close eye on this in the coming months, with the recent lockdowns in Victoria and New South Wales likely to have put increased pressure on borrowers who were already facing repayment difficulty.”

“There is no doubt that COVID-19 pandemic has certainly challenged the banks over the past 18 months, but it has also presented them with a unique opportunity to speed up their transformation journey and cultivate the type of innovation that will build a more successful and sustainable future for the Australian banking sector. Immediate priorities include the continuation of their simplification and digitisation strategies to boost efficiency and improving customer experience in the face of increasing competition from fintech and bigtech disruptors – particularly in the payments space where we are seeing the rapid expansion of buy-now-pay-later options.”

“Climate change risk is also high on the agenda in the wake of COP26, particularly as the major banks participate in the Australian Prudential Regulation Authority’s (APRA’s) first climate vulnerability exercise assessment,” Mr Dring said.

Housing credit growing, but competition is steep

Strong borrower demand and low interest rates have driven robust housing credit growth over the last year, with mortgage lending growth at a system level almost doubling in the 12 months to September. However, competition in this space is intense.

“Not all the major banks have benefitted equally from the surge in housing credit, with strong competition and volume processing challenges resulting in a marked divergence in home loan performance between individual banks,” Mr Dring said.

“We expect to see the mortgage market evolve even more rapidly over the next few years, as open banking, big data and other digital innovations drive more personalised customer experiences. Tailored, customer-centric value propositions, speed – reducing the time to yes – and simplicity will be key factors to winning new home loan customers in future.”

“Strong demand coupled with limited supply has also resulted in a rapid rise in house prices, which have increased by more than 21% over the year to October, according to CoreLogic data. This has spurred renewed policy concerns over housing affordability. To address rising household leverage, APRA has increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications. While this could potentially dampen housing market activity and price growth, it is expected to have only a modest impact given most borrowers are already restricted by the floor rates used by lenders,” Mr Dring said.

Higher investment spends partially offset by productivity benefits

“Ongoing investment in digital transformation, risk and compliance initiatives and higher processing volumes have kept the pressure on expenses. Additionally, customer remediation of historical wealth and anti-money laundering issues also continued to impact costs for some of the banks this period,” Mr Dring said.

“With the pandemic accelerating digital transformation across the economy, banks have been forced to boost their investment spend in key technology areas such as automation, cloud solutions, APIs and data science in order to improve customer experience, help with COVID-19 support measures and drive growth.”

“We’ve also seen an increase in staff expenses and IT infrastructure costs to facilitate and support flexible working conditions. However, the productivity benefits of these initiatives, coupled with disciplined management of underlying operating costs and business simplification initiatives, have helped to offset some of the higher investment spend.”

“We can expect to see continued digital investment by the banks over the next year, particularly as BigTechs and other new market entrants look to expand their presence further into Australian financial services.”

Digital disruption challenging the status quo

“Disruptions in the payment sector have picked up throughout the COVID-19 pandemic, with consumers increasingly willing to embrace digital solutions and expecting newer, faster and more flexible experiences. Fintech and bigtech players are targeting new revenue streams and customer acquisition, challenging traditional banking,” Mr Dring said.

“Solutions like contactless payments, P2P and mobile wallets offer opportunities for providers to be involved in consumers’ everyday life, not just the bigger occasional life-stage moments. The latest EY NextWave global consumer banking survey found that 54% of Australian consumers would value their primary financial provider more if they partnered with other brands to expand their products and services – rising to 70% for Gen Z and millennials. So, banks have a real opportunity here to become more relevant to their customers through strategic partnerships and collaborations with some of the newer market entrants.”

“To do this effectively though, banks will need to become more agile, innovative and responsive. A digital-first approach, leveraging smart technologies and collaborations, will be key to both reducing their cost-to-serve and delivering more personalised financial experiences for their customers.”


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Key Contacts:

Rebecca Aley  

Ernst & Young Australia

+61 418 835 849