Steady half year for major banks
Australia’s major banks - ANZ Bank, CBA, Westpac and NAB - have posted a profit before tax of $15.7 billion for the 2010-2011 half year, up 8 percent from last year’s $14.5 billion, however the results are mostly predictable and reflect a half year of little change, according to KPMG's survey of Major Australian Banks Half Year 2011.
Forty-six percent of the profit increase was driven by a reduction in loan impairment charges from $3.3 billion to $2.7 billion, flat margin, modest asset growth, increased wealth management income and an improvement in average cost to income ratios as the major banks focused on reducing costs amid slowing revenue momentum.
KPMG’s Head of Banking, Andrew Dickinson said the lack of revenue momentum presents a concern for the banks. “The major banks’ results reflect flat margins and modest new lending which will present a challenge to future growth. Their short and long term focus will be on achieving strategic and sustainable growth."
Credit quality is gradually improving although provisioning reductions have been somewhat offset by collective provision overlays following the severe weather events in Australia and New Zealand. "The increase in loans 90 days past due, while it hasn’t impacted provisions, needs to be watched closely," said Michelle Hinchliffe, KPMG’s Head of Financial Services.
The majors' cash return on equity (ROE) is an average of 16.9 percent compared with 16.2 percent in second half 2010. "The current returns are well below 2006 levels of 20 percent and reflect the continued challenges of producing higher earnings while maintaining high levels of capital," said Ms Hinchliffe.
Net interest margin of 225.5 bps compares to 224.5 bps for half year 2010 however the majors produced varying results at a margin level reflecting their different asset and liability portfolio mix.
Capital adequacy remains a focus for the majors with tier one ratios remaining strong and all four major banks remain confident they can absorb the challenges of regulatory change. "The Australian banks are some of the highest capitalised banks globally and this gives them great strength and resilience," Michelle Hinchliffe said.
The outlook for Australia’s major banks for the remainder of 2011 is likely to be more of the same, with little sign of immediate change in the economic and regulatory climate. "The longer term outlook is harder to predict as external influences such as global regulatory change (Basel III) and possible domestic changes flowing from the Senate Inquiry into Competition in the Banking Sector will impact banks’ economic markers, particularly around capital requirements and fee pressure," Andrew Dickinson said.
Growth will be difficult to achieve from margins and may cause a shift to fee income in corporate and business banking which is currently flat," Mr Dickinson added.
"The challenge is for sustainable growth brought about by increased revenue, not lower credit impairment," Ms Hinchliffe said.