EY analysis of the 2022 half year results of Australia’s major banks
- $14.4 billion in combined headline cash earnings across the four major banks, up $700 million from the 2021 half year results, an increase of 5.1%
- Return on equity across the big four banks increased by an average of 20 basis points from the 2021 half year, to 10.6%
- Average net interest margins decreased 14 basis points from the 2021 half year, to 1.75%
- Credit impairment charges decreased 100% from the 2021 half year, to a write-back of $220 million
Robust asset growth and quality, capital returns and careful expense management have all contributed to a solid performance from Australia’s major banks in their 2022 half year results, although margins continue to constrain earnings according to analysis from Ernst & Young, Australia (“EY Australia”).
The EY Australia report shows the big four banks delivered combined cash earnings of $14.4 billion for the 2022 half year, an increase of 5.1% from the same time last year.
Asset quality also generally improved, with impairment risks moderating as businesses reopen, border restrictions ease and the local economy continues to recover. However, this positive outcome is tempered by the ongoing economic uncertainties, particularly inflationary pressures. Although the increased level of high debt-to-income lending also sounds a note of warning, household balance sheets are generally in good shape, with many households having built up substantial buffers on their mortgages.
Other pressures remain, with net interest margins (NIM) declining across all the banks – down to an average of 1.75% – driven by a low interest rate environment and exacerbated by intense competition and an unfavourable mix of fixed-rate mortgage loans. These headwinds look set to continue into the second half of the year, although the outlook is a little brighter in light of the recent the cash rate rise.
Tim Dring, EY Region Banking and Capital Markets Leader, Oceania said: “While margin compression is likely to continue in the short term, the rising interest rate cycle should ease NIM pressures and lead to improved profitability for the banks over the medium term. However, ongoing economic risks point to continued uncertainty for the banking sector’s outlook. Last week’s higher than expected rise in the official cash rate by the RBA, and future expected rises, offer top line revenue growth opportunities and earnings upside. On the flip side though, rate rises coupled with strong inflation could also put pressure on asset quality and slow credit growth, and continued mortgage competition may also reduce margin upside for the banks. In the current economic environment, the only real certainty for the sector is uncertainty.”
Lowering the cost base
“In the face of ongoing profitability pressures, managing margins will remain key areas of focus for the banks for some time yet,” Mr Dring said.
“The half year results show the banks have continued to execute well on their expense management initiatives, although costs remain elevated due to ongoing compliance, regulatory and technology programs, with the need for additional resources to meet loan demand and to address cybersecurity and financial crime risks.”
“Reducing the cost base remains a challenging task, given traditional operations silos, complex legacy systems and the need to respond to ever-evolving regulatory requirements. This is contributing to the banks’ struggle to transform their banking operations with an integrated, holistic approach that leverages data and analytics to inform risk management and, perhaps most importantly, enable the banks to form a forward-looking view of risks and opportunities.”
Talent challenges remain
“Another significant challenge for the banks at present is around acquiring and retaining talent, with shortages for critical in-demand skills such as data and engineering,” Mr Dring said.
“Employees increasingly want a job that offers meaning and purpose. Rather than the Great Resignation, we are observing something more akin to the Great Reshuffle, with employees choosing to move to more personally satisfying roles. So, in the war for talent, salaries aren’t the only factor. To remain attractive, banks will need to focus more on their people experience, with a clear business purpose and an engaging employee value proposition.”
Build-to-rent gaining traction
“With housing shortages looming across several states, institutional build-to-rent developments are starting to gain greater traction in Australia, with state governments implementing various schemes and incentives to attract investors,” Mr Dring said.
“Build-to-rent is a particularly attractive option for institutions, such as large superannuation funds and property investment companies, seeking reliable, steady returns. While institutional build-to-rent will only represent a small portion of the overall residential asset class, the sector will be dominated by institutional platforms which will be an important source of lending growth for all the Australian major banks. Financiers will need to better understand the dynamics of this asset class in order to compete with the overseas financial institutions that currently dominate the financing of these projects.”
Where to from here?
“Looking ahead, economic pressures point to continued uncertainty for the banking sector, despite the expectation of a rising cash rate that should help ease the pressure on margins and boost the banks’ profitability,” Mr Dring said.
“This highlights that banks cannot afford to take their foot off the accelerator when it comes to their strategic cost management and operations transformation. The banking sector is moving from an era of large multi-year transformation programmes, to one of building capabilities to manage continual change and create more sustainable, future-ready organisations. In this environment, following through on simplification, innovation and digitisation strategies will be key to the banks boosting their efficiency, improving customer experience and remaining competitive against disruptive new players.”