Record earnings aside, the big four banks are facing significant revenue and margin headwinds that make them vulnerable to disruption from new players, says a new KPMG report.
KPMG's Major Australian Banks Full Year Results 2014-15 report said recent increases in home lending rates indicate that banks have the ability improve margins, but will need to be careful in balancing both shareholder and customer interests.
KPMG Asia Pacific head of banking Andrew Dickinson said: “Balancing of shareholder and customer interests will be required in future to ensure disruptors are not further emboldened to attack established lenders’ business models."
The report said that while the cost to income ratio decreased from 45.6 per cent last financial year to 45.3 per cent this year, banks will need to change their operating models to enhance customer experience and reduce their cost base.
KPMG Australia head of banking Ian Pollari said: “At the core of this will be the digital enablement of distribution channels, particularly branches which represent such a significant portion of the banks’ overall cost base.”
Moreover, Mr Dickinson argued the importance of responding to changing customer demands and digital trends.
“Longer term, we see customer behaviour and competitive dynamics continuing to rapidly evolve, driven by demographic changes, the digital revolution and the rise of fintech competition, presenting both threats and opportunities for the major banks,” said Mr Dickinson.
“In order to enhance their level of agility, the majors will need to intensify their efforts to simplify, standardise and automate their operating models, as well as preserve optionality in their strategies in order to capitalise on opportunities as they arise.”
The report found that return on equity (ROE) was down from 15.5 per cent to 15 per cent from the previous year, despite a 5.4 per cent increase in combined cash earnings.
Mr Dickinson said all major banks will be challenged by declining ROE going froward.
“Revenue and margin headwinds, rising costs and capital levels, with a deteriorating credit quality outlook all mean the majors will face challenges in reversing declining returns in the years ahead," he said.