A new analysis of the half year results of Australia’s big banks has revealed that the banks’ combined profits have decreased by 11.8 per cent due to remediation costs.
The EY analysis of the big four has shown that total remediation costs of $4.8 billion over the last 18 months have driven profits to $13.9 billion.
Stated profit post-tax was down for three of the big four banks, with the exception being National Australia Bank, which reported a 1 per cent increase from the prior corresponding period.
All banks reported an uptick in total assets from the prior corresponding period with ANZ seeing the biggest increase of 4.8 per cent.
EY Oceania banking and capital markets leader Tim Dring said that slowing revenue, higher remediation costs and the royal commission had all impacted the outlook for the banks.
“The financial services royal commission has disrupted the banks’ risk appetites and business flow, propelling them to reshape their processes, simplify products and address compliance obligations, as they prepare for more intensive levels of regulatory supervision and enforcement from APRA and ASIC.
“It has also revealed issues in their back books,” said Mr Dring.
Cash earnings were up for all the banks except for Westpac, which saw a 22.4 per cent drop but Mr Dring said those earnings didn’t take into account the remediation costs impact to profit.
“Remediation costs have related mostly to misconduct issues within wealth management divisions.
“But, on-going investigation into product design and compliance will likely see further increases in the banks’ remediation burden that will put cost-to-income ratios under increasing pressure,” he said.
Currently remediation costs across the big four have reached $4.8 billion, with $1.9 billion set aside in the 2019 half year results according to Mr Dring.
Mr Dring said banks also had to face a stricter pay framework in BEAR and a stronger regulatory regime while at the same time fighting off competition from non-banks and foreign banks.
“In this environment, the importance of technology enhancements to accelerate and improve verification processes cannot be underestimated. The race is on to see who can streamline their processes to become more efficient and compliant,” he said.
The banks were also having to face slower loan growth driven by tightening of risk appetite and credit standards and falling house prices.
“Non-performing loans remain well-secured but, if housing values continue to fall, some past-due housing loans could become impaired. Further risks are also likely to emerge as interest-only loan periods expire and borrowers struggle with higher repayments.”
EY’s chief economist Jo Masters said Australia’s economy had finally lost its considerable momentum, which was reflected in a softer housing market and fragile consumer confidence.
“The economic outlook now is more challenged than it’s been for some time and this will present some headwinds for the banking sector,” she said.
Credit growth was also slowing, said Ms Masters, which combined with other factors would create a more challenging environment for the banks to thrive in.
“While the environment remains relatively benign at present, the headwinds are mounting as low-saving households face anemic wage growth, record-high debt, increasing portions of budgets being taken up by non-discretionary spending and, now, falling housing prices.
“It seems inevitable that we are in for a period of slower economic growth and this will present another challenge for the major banks’, especially if households look to deleverage,” she said.
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