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Major banks ‘walking tightrope’ as headwinds intensify

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KPMG, EY, and PwC have released their analysis of the major banks’ half-year results.

Australia’s big four banks have delivered a strong set of results for the half year, according to new analysis by KPMG, EY, and PwC, with substantially higher earnings and return on equity.

However, the firms have cautioned that the major banks are entering a challenging period characterised by intensified competition, escalating costs, rising interest rates, and persistent uncertainty.

According to EY’s analysis, the banks are being asked to manage the competing demands of investors, customers, regulators, and government in an “increasingly uncertain and volatile backdrop”.


“Australia’s major banks are walking a tightrope as headwinds for the sector intensify,” said Doug Nixon, EY Oceania banking and capital markets leader. 

Assessing that while the resilience of the Australian economy continued to support credit growth and quality throughout the first half of the year, Mr Nixon warned that the benefits could soon erode. 

“Intense competition in response to retail credit growth compression, coupled with rising funding costs, amplified by the recent dislocation in financial markets, will likely erode the benefits the banks have gained from the higher interest rate environment,” said Mr Nixon. 

As such, he suggested that asset quality deterioration is a “real risk” for the banks, as are ongoing increases in operating costs driven by inflationary pressures, staffing, technology, cyber security, and remediation.  

“So, while Australia’s major banks remain strong and resilient, pressure on net interest margins, combined with the increasingly uncertain operating environment, means they face a complex high-wire balancing act when it comes to managing profitable growth, customer expectations, investment priorities, and shareholder returns,” Mr Nixon said.

Signs of stress

While margins have surpassed levels not seen since 2019, KPMG indicated that they are under pressure from intense pricing competition in the home loan market, coupled with a significant increase in interest expenses.

“In this reporting period, we see the majors have grown both the volume and profitability of their loan books,” said Steve Jackson, KPMG Australia’s head of banking and capital markets.

“However, this is now being offset to a degree by the more than 400 per cent increase in interest expense compared with 12 months ago, driven by the rising cost of deposits and wholesale funding.”

KPMG said that balance sheet strength remains a core focus for the big four, with an average Common Equity Tier 1 (CET1) ratio of 12.3 per cent, or 62 basis points higher than in the second half of 2022.

“While the headline results for the period are positive for the majors, there are early signs of stress in the loan portfolio as a result of the soft economic outlook,” Mr Jackson noted.

“With interest rates elevated, the majors are seeing a margin benefit, but this is being eroded by a combination of loan pricing competition, funding cost increases, and a continued rise in bank costs.”

The recent uptick in net interest margins (NIM) has had a dramatic impact on bank income, according to Sam Garland, banking and capital markets leader at PwC Australia.

However, he noted, given a 350 basis point increase in cash rates in the 10 months to March, that margin benefit has been shorter-lived and smaller than many anticipated. 

“This is the reality of a much simpler set of banks — the base of income is now heavily focused in lending and deposits, which are extremely competitive and most banks described the NIM benefit as having peaked already. In the core business, the ability to continue controlling costs will therefore be key, as will the impact of a changing credit loss environment,” Mr Garland said. 

PwC identified four key themes that it predicted would play out in the medium term, including a “squeeze on the core” as a result of continued competition, inflation pressure on costs, and a “more normal” credit loss environment.

A “doubling-down” on digital, a revisit of diversification, and tests of major banks’ resilience and reputation were also among the themes anticipated over the medium term.

“Overall, Australia’s major banks remain in terrific balance sheet and business model shape, with regulatory metrics well in the top quartile of international banks and businesses simple and focused,” said Mr Garland.

“While this has led to a narrower base of earnings, it has also put our banks in a far stronger position to absorb volatility and explore new opportunities. The banks are likely to be extremely discerning of the risk/reward trade-off in these decisions.”

Concerns regarding US banking failures 

Additionally, EY said that Australia’s major banks would need to manage the consequences for risk management arising from the disruptions in the global banking system. 

The firm noted that recent overseas bank failures in the US and Europe have had a “relatively mild” impact on Australia’s financial system, but warned that, according to history, “tightening cycles tend to flush out hidden weaknesses in the financial system”.

“We don’t yet know the full consequences of the current monetary tightening,” EY said.

“Given the deposit outflows that led to the failed US banks, Australian banks are taking a more granular look at their deposit mix, including the proportion of insured to uninsured deposits. 

“Also, while the fallout for Australia’s broader financial system has not been significant, the impact on funding markets will weigh on the banks’ funding costs.”

US financial authorities last week announced the closure of First Republic Bank, which became the latest US banking institution to fold following the collapses of Silicon Valley Bank, Signature Bank, and Silvergate Capital earlier this year.

Major banks ‘walking tightrope’ as headwinds intensify

KPMG, EY, and PwC have released their analysis of the major banks’ half-year results.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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