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Banks warned to brace for ‘tough market conditions’

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KPMG, EY, and PwC have analysed the full-year results of, and shared their outlooks for, Australia’s big four banks.

Australia’s major banks delivered strong results over the 2023 financial year, according to analysis by KPMG, EY, and PwC, driven by cash rate hikes and higher net interest margins.

But KPMG has described FY2023 as a “tale of two halves”, with the combined cash profits and average net interest margins of Commonwealth Bank, Westpac, ANZ, and NAB both moving lower between the first and second half of the financial year.

“It has been another very strong full year result for the majors, who have continued to grow during the year, despite cash profits and net interest margins falling in the second half as strong competition and rising funding costs offset the benefits of higher interest rates,” commented Steve Jackson, head of banking and capital markets at KPMG Australia.


PwC said that the weaker second half confirmed the “challenging competitive reality” of banking in Australia. Sam Garland, banking and capital markets leader at PwC Australia, warned that continued uncertainty will require vigilance and focus from the banks.

“On the one hand, the worst fears about the economy and the impact on the banks have not yet come to pass. Credit growth remained healthy, if slowing, and households and businesses are under strain but appear to be, on average, coping. So far, so good,” he said.

“While credit expenses rose and there are increasing levels of impaired or overdue loans, this remains well within expectations and is some way short of a real spike. There is no guarantee this will continue of course and whether borrowers can continue to adjust to such a rapid increase in rates.”

Comparing the two halves of FY23, Mr Garland noted that competition for loans and deposits weakened the earnings benefit which came from rapid interest rate rises.

“The much-anticipated margin benefit of rising rates was smaller and cut shorter by intense competition for lending and deposits. Despite a 400 bps increase in cash rates from the start of the tightening, margins rose only 11 bps for the year as a whole and actually fell 7 bps in the second half as competition intensified,” he continued.

“Costs also rose faster in the second half as the lag effect of inflation in personnel and technology flowed into the results. Given the significant ongoing investment required in technology, risk and regulation, it is no surprise that cost management will be high on all banks’ agendas.”

In its analysis, EY warned that economic headwinds and slowing loan momentum were pointing to “increasingly challenging times ahead” for the Australian banking sector.

Recent indications, the firm said, are suggesting revenue and earnings will likely moderate in the future due to the impact of inflationary pressures and falling household consumption.

“The banks, like consumers, are facing some tough market conditions ahead. With mortgage profitability continuing to tighten, the banking sector is hunting for growth outside retail lending, in areas such as business lending, and looking to optimise funding and operational costs,” said Doug Nixon, EY Oceania banking and capital markets leader.

Mr Nixon noted that tighter financial conditions and serviceability requirements have resulted in a significant slowdown in residential mortgage demand.

“So, while mortgages have long been the traditional Australian banking sector growth engine, the current environment has put business lending firmly back on the banks’ agendas,” he added.

“The banks are also looking at funding, including the deposit markets. To gain a competitive edge in this space though, banks will need to revisit their deposit strategies, including which customer segments to target.”

Looking ahead, Mr Garland suggested that there is considerable uncertainty in the external environment, while the big four banks continue to face strategic challenges.

“There are questions whether the economy can sustain this ‘Goldilocks’ tightening and the impact on bank customers while globally, the geopolitical environment could impact economies worldwide,” he said.

PwC has identified four themes that it expects will play out in the banking sector in the short to medium term: a “squeeze on the core”, a doubling down on digital efforts, a search for new sources of value and growth, and tests of resilience and trust.

“Overall, Australia’s major banks are very well positioned in capital, provisions, and franchises to absorb and respond to uncertainty and continue their focus on transformation for the future. These will require exceptional levels of vigilance and focus to ensure they can keep delivering,” Mr Garland concluded.

Banks warned to brace for ‘tough market conditions’

KPMG, EY, and PwC have analysed the full-year results of, and shared their outlooks for, Australia’s big four banks.

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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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