Low interest rates and the fallout of the Hayne royal commission have culminated in a 7.8 per cent decrease in combined cash earnings for the major banks.
The combined cash earnings of the major banks were down $2.3 billion from the 2018 full-year results, while return on equity decreased by an average of 125 basis points to 10.9 per cent.
Total customer remediation costs of $5.7 billion before tax were up $2.7 billion from the 2018 full year.
According to EY analysis of the major banks’ 2019 full year results, net interest margins (NIM) have fallen by an average of 9 basis points from the prior comparative period, largely driven by intense pricing competition. Lower earnings and higher capital requirements have also flowed through to the banks’ return on equity (RoE), which has continued its downward trend by an average of 125 basis points, to 10.9 per cent.
“There’s no doubt that 2019 has been a tough year for Australia’s major banks and the storm clouds show no signs of abating,” EY Oceania Banking and Capital Markets Leader, Tim Dring said.
“Declining profits and margins have seen the banks cut dividends and preserve capital, as they batten down the hatches and brace for further challenging conditions ahead.”
Mr Dring pointed to a long list of factors that are putting pressure on the performance of Australia’s major banks, including uncertainty in global markets, a slowing local economy and ultra-low interest rate environment, increasing consumer and regulatory pressures, heightened competition and significant remediation costs.
“With the global economy largely stuck in neutral and subdued consumer and business confidence constraining inflation and wage growth, pressure will be placed on unemployment rates, loan arrears and asset values,” he said.
“For now, asset quality remains strong but benign credit conditions will not continue indefinitely and, when the credit cycle turns, that will squeeze the banks’ future profits even further.
“The banks are also facing additional headwinds in the form of elevated risk and compliance investment requirements and the need for additional remediation provisions.”
The EY analyst noted that in the current environment, bank performance is no longer purely about financial results – it’s also about rebuilding trust.
“Post the royal commission, and even before, the major banks have really accelerated their efforts to enhance accountability and improve risk culture,” Mr Dring said.
“Systematically incorporating non-financial risk and performance into their reporting will be a critical part of this, requiring significant investment in defining, measuring and tracking these. How boards respond will also be a key part of rebuilding confidence and trust in the sector, and we are likely to see closer links between non-financial performance outcomes and remuneration, including long-term incentives.”
Another key challenge for the banks, Mr Dring noted, is the operational side of their remediation program: “Identifying the provision is one thing, but actually getting the cash back in the hands of the customer represents a significant task for the banks – one that needs to be handled quickly and efficiently.”
Mr Dring said there is a seismic shift occurring in consumer preferences, economic trends and regulatory environment. Coupled with increasing pressure from new non-traditional players, like neobanks, payment service providers and technology companies, these changes mean that banks will have to make some tough choices in order to remain relevant and rebuild trust.
“With the rapidly approaching introduction of open banking, the next few years will usher in changes that will fundamentally shift the Australian financial services landscape,” he said.
“Banks should be considering a shift to more transparent strategies that focus on promoting customers’ financial wellbeing and moving away from product-centric selling models towards ones that offer more customer-centric, personalised subscription-based services.”
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