The big four Australian banks are facing downward pressure on their margins, higher capital requirements and the emerging threat of new entrants, says a new KPMG report.
The major banks have posted a somewhat 'mixed' first-half result to March 2015, according to the KPMG Major Australian Banks Half Year Results 2014-15 report.
The big four banks reported a cash profit of $15.4 billion for the 2015 half-year, up 10.7 per cent.
KPMG said the result was "aided by a strong housing market, continued low impairments and favourable funding conditions".
"The positive revenue result was primarily driven by continued strong growth in house lending and wealth management, underpinned by buoyant investor demand, stock market performance and net inflows," KPMG said.
"The majors recorded an average net interest margin of 204 basis points, down three basis points compared to the second half of 2014."
But KPMG national head of banking Ian Pollari said that while wholesale funding costs and competition for deposits has eased, margin compression has continued "as a result of competitive pressures, higher holdings of liquid assets and the prevailing low interest rate environment".
The banks have maintained their asset quality over recent years, but bad and doubtful debts increased from $1.6 billion to $1.7 billion in the first half of 2015, KPMG said.
"The average cost-to-income ratio increased across the majors excluding NAB by 100 basis points to an average of 43.7 percent for the 2015 half-year (down from 47.2 percent to 43.9 percent including NAB)," said the report.
KPMG attributed the faster growth of costs than revenues to "the need for banks to invest in meeting regulatory compliance obligations and enhancing their digital capabilities".
"The majors’ capital position continues to present challenges, with their aggregate Common Equity Tier 1 capital ratio declining by four basis points over the first half to 8.89 percent of risk-weighted assets, largely reflecting the impact of increased regulatory capital requirements," the report said.
Mr Pollari said the banking industry will be challenged by a confluence of factors in the near future.
"[These include] as rising and higher quality levels of capital; customers demanding greater levels of personalisation and a seamless digital experience; the emerging threat of new entrants and, finally, investors seeking further dividend growth," Mr Pollari said.
“Ultimately, something or someone will have to give."
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