Strong economy helps major banks to rebound swiftly

KPMG

KPMG Major Australian Banks First Half Year Analysis 2021: KPMG analysis finds that the Australian major banks (‘the Majors’) have reported a strong turnaround in their financial performance for the first half of financial year 2021.

KPMG’s Major Australian Banks First Half Year Analysis Report 2021 finds that the Majors reported a combined cash profit after tax from continuing operations of $13.8 billion, up 62.3 percent percent on 1H2020.

The Majors’ performance has recovered from last year, on the back of a strong public health response to COVID-19, as well as assertive Government fiscal and policy interventions to support jobs and the economy. In turn, the Australian banking sector has benefited from an economic performance that has been better than anticipated (for instance, unemployment at 5.6 percent in March 2021 was lower than originally predicted) with household finances in a strong position. As a result, lending has continued to grow (with less than 1 per cent lending growth for the Majors compared to 2H2020).

Ian Pollari, KPMG Australia’s Head of Banking commented: “While the banks have acted as shock absorbers for the economic downturn last year, so far they have been beneficiaries of more favourable market conditions in 2021. The key has been effectively balancing supporting customer demand and maintaining resilience through the pandemic, while at the same time executing on their ongoing regulatory change and transformation agendas”.

The Majors have continued to further strengthen their balance sheets’ through this half year. Collectively, they have chosen to retain sufficient profits and proceeds from divestments to lift their CET1 ratio by 105 bps to 12.4 percent. It should be noted that the sector’s capitalisation has not been this strong in decades.

The very strong rebound in net profits and ROE is notable. The contrast with FY20 is stark and while the economic recovery was uneven, its speed was remarkable. However, adjustment of these key profit and return metrics for the COVID-related provisions (FY20) and subsequent writebacks (1H21) reveals that a more stable underlying picture. While reported pre-tax net profit growth against 1H20 is 45.8 percent, after these adjustments this is a more modest 1.3 percent.

Lending rates have come down further in the current low interest rate environment resulting in a mild increase of the Majors’ NIM performance (up 1.5bps from 2H20). This has been driven by decreases in deposit rates that have more than offset the decline in lending rates, as well as the Majors’ use of the attractive Term Funding Facility (“TFF”) offered by the RBA. As deposit rates are bottoming out and the TFF closes on 25 June 2021, NIMs will decline in the second half of FY21.

Hessel Verbeek, KPMG’s Banking Strategy Lead, said: “While in this half year the Majors have managed to balance lending and deposit growth with protection of their profit margins, their interest margins and profitability will continue to be under pressure in the current low interest rate environment.”.

The Majors continue to face elevated regulatory compliance and ongoing remediation requirements. As a result, their costs remain stubbornly high. At the same time, the Majors are streamlining and digitising their processes (which remain highly manual in nature). While they are focused on cost transformation and are making progress in areas, their overall cost efficiency is still above where it needs to be (with their cost-to-income ratio declining by 312 bps to 50.2 percent). The potential for cost reduction through business and operating model simplification, end-to-end process digitisation and digital distribution remains significant.

Verbeek added: “In a lower margin environment, cost management becomes ever more important. The Majors need to focus on the root causes of inefficiency with their cost transformation efforts, not in the least through end-to-end automation and digitisation of their processes.”.

Key highlights of the results

  • Total operating income (cash basis) increased slightly by 0.8 percent to $39.6 billion, reflecting the continued squeeze on margins and subdued asset growth. The Majors grew their mortgage books by a combined 2.0 percent in HY2021, with non-housing lending declining by 2.6 percent.
  • The Majors reported a cash profit after tax from continuing operations of $13.8 billion, up 62.3 percent percent compared to the first half of 2020. This increase has been driven by aggregate impairment benefits across each of the Majors, as well as the non-recurrence of certain significant one-off items.
  • Credit quality has improved as the economy recovers, leading to an decrease of 27.9 basis points in impairment charges as a percentage of gross loans and advances. The Majors’ reported an aggregated loan impairment benefit of $109 million, reflective of stronger than expected economic forecasts and more customers coming off loan payment deferrals and returning to a performing state
  • The average Common Equity Tier 1 (CET1) capital ratio increased 105 basis points to 12.4 percent, driven by capital management initiatives including divestment of non-core businesses, dividend management and improvements in asset quality.
  • The major banks recorded an average net interest margin of 187 basis points (cash basis), down 6 basis point compared to the first half of 2020, largely driven by lower lending rates, higher holdings of low-yielding treasury assets, partially offset by the Term Funding Facility and low deposit rates.
  • In the absence of some large significant items in the current period, combined with stronger asset quality and growth in operating income, return on equity (ROE) for first-half of 2021 have rebounded. ROE has increased by 381 basis points to an average of 10.4 percent.

Evolving customer needs and behaviours, as well as the competitive environment continue to drive the innovation agenda. The Majors are responding to the signals they are receiving from their customers in areas like digital channel adoption and the introduction of new products. At the same time they are making it easier for staff and third parties, like brokers, to deal with them.

“Customers and the evolving competitive environment continue to set the pace for innovation in the banking sector. The Majors are all pursuing bolder, transformational strategies in response to demand for a better experience by customers and they are recognising the window of opportunity to re-set their business and operating models for the future.”, said Pollari.

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