Challenges, choices and complexities

With the last of Australia’s four banking majors, NAB, reporting that as with the others its cash earnings today are down, the reality is the major’s return on equity (ROE) has halved over the past 15 years, with net interest margins, lower growth and fee reductions squeezing ROE closer to the cost of equity.

Each of the bank’s CEOs has called out the absolute focus on ‘fixing things’ from the past for customers and becoming simpler, more transparent and ‘value-adding’.

Steven Cunico, Deloitte banking, treasury and capital markets partner and author of Deloitte’s analysis of the 2019 full year results for the majors said: “Despite aggregate cash profit and total income being significantly down over last year’s numbers, by 7.8% and 3.7% respectively, the reality is that each bank is in the business of transforming itself to invest in better more ‘customer-centric’ products and services and stronger compliance and controls.

“The good news is that this is not just beginning. The transformation work has been going on in some instances for at least four years.”

Cunico said: “The majors can control their costs, and each CEO has been actively doing so. What isn’t easy however, is to do so while delivering top flight service, redesigning processes, and investing in compliance and technology. This is in addition to the culture changes that come with implementing APRA’s Banking Executive Accountability Regime (BEAR) which were effective from 1 July 2019.”

The Deloitte report called out the competitive nature of the sector by asking which bank will cross the ‘perception’ finish line first? A big challenge it identified in Australia’s domestic environment is that of non-financial risks. This is where broader societal and community expectations are demanding significant leadership attention and resources, and organisational culture, fairness and trust have become part of the national conversation.

Cunico said: “These community changes are the focus of the changing competitive dynamics, where foreign banks, non-traditional players, and the regulators identify where customers are having difficulties, and to the customer’s benefit they are finding new ways of easing the pain and shifting the control back to the customer. Open banking where the customer will own his or her own data by February 2020 is a case in point.”

The Deloitte report compares each of the four major’s numbers across the four business dimensions of growth, efficiency, quality and risk and capital and funding.

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