The big four are facing significant pressure on earnings in the years ahead as record-low interest rates and loan deferrals bite into their bottom line.
The big four banks’ total impairment charges have risen a massive 201.6 per cent to $11.9 billion off the back of mortgage and loan deferrals – and while many customers have resumed payments, EY believes they should anticipate higher losses and defaults as relief measures are unwound and unemployment peaks in mid-2021.
“It really is a waiting game and the banks are bracing for impact, with the full effects of the economic downturn on asset quality yet to play out,” said Tim Dring, EY Oceania banking and capital markets leader.
“While the banks are preparing for portfolio distress, the true scale won’t be revealed until forbearance programs and income support measures draw to a planned close in the first quarter of the 2021 calendar year.”
The banks will need to take a “compassionate approach” as they begin to collect on frozen loans, with many customers likely to need customised payment strategies and solutions.
“Predictive and high-frequency analytics will be essential to understanding individual customer’s probability of default,” Mr Dring said.
“In this way, banks can incentivise at risk customers to proactively reach out to them for a more tailored and effective service – at the same time building loyalty and improving recovery return rates.”
Expenses have also ballooned through the year, with ANZ spending $500 million more on new systems and maintenance while Westpac saw a blowout of 6 per cent off the back of a hiring spree aimed at turning its risk culture around.
“Tackling costs remains one of the great challenges for the major banks, particularly in this lower for longer environment,” Mr Dring said.
“The banks are continuing to invest in technology, process automation, digitisation and process simplification and it will be these investments that, if well executed, should help them generate a reduced costs base.”
But EY has an optimistic outlook for the big four, noting that the sector remains resilient despite the challenging operating environment.
“As we transition into the recovery phase, banks can still position themselves for future growth,” Mr Dring said.
“To help rebuild profitability in the wake of the COVID-19 crisis, we expect to see banks focused on improving their digital capabilities and developing more agile operating models that will enable them to deliver a better customer experience and create capacity to invest in further transformation.”