A challenging regulatory environment, slower revenue growth and increasing costs associated with the royal commission have seen the total cash profit for the major banks fall by $2 billion.
Deloitte’s analysis of the full-year financial results of Australia’s big four banks shows that collectively the majors made $29.5 billion in FY18, down 6.5 per cent or $2 billion.
KPMG found that the average cost-to-income ratio increased by 356 basis points across the majors to 46.6 percent, attributed to meeting rising regulatory compliance, legal and remediation requirements, as well as restructuring.
EY’s analysis noted that remediation and restoring community trust will be prime concerns for the sector over the short to medium term, particularly in an environment where reputation may be the new driver of competitive advantage.
“As a result, profit growth may remain constrained,” the group said.
“Costs associated with the royal commission are likely to continue to adversely affect the banks’ expenses through customer remediation, legal fees (including potential class actions) and potential recommendations for system changes. Proposed enforcement action by ASIC for breach reporting failures could further add to costs.”
ANZ, CBA, NAB and Westpac have all expressed a desire to build simpler, more efficient banks and warned that revenue growth will be harder to come amid tighter margins and a difficult operating environment.
Deloitte Senior Banking Paul Wiebusch said the banks are rebuilding their businesses while “flying through turbulence with further headwinds ahead”.
“They will also have to navigate open banking data sharing environments with lending growing at less than five percent, making this the lowest growth rate in a decade,” he said.
“Given this ‘new normal’, the two engines of growth for profitability will be a clearer customer focus and service and product simplification.”
According to Deloitte, total operating income for the four major banks declined almost 1.0 per cent ($0.8 billion) to $85 billion in 2018. Net Interest Income grew by 2.2 per cent ($1.3 billion) to $63 billion. Housing and business lending remained subdued. With new lending offset by principal repayments, lending grew at only 3.1 per cent.
“In an operating environment of low growth and tighter margins, it will be very important to get both efficiency and business simplification right,” Deloitte national lead partner Paul Rehder said.
“Whether it's ‘getting back to basics’ or ‘Banking 101’, almost all the four major banks have either divested, or are in the process of divesting, one or more of their life insurance, funds management, wealth management, or offshore operations, and reallocating capital internally to owner-occupied home lending and business banking."