Big four grow first-half earnings by 5.1% on tighter margins
Australia’s big four banks reported combined headline cash earnings of $14.4 billion in their 2022 half-year results – up 5.1 per cent from the same time last year, according to an analysis by Ernst & Young (EY) Australia.
EY says robust asset growth and quality, capital returns and careful expense management contributed the big four’s performance although margins continue to constrain earnings.
It adds that impairment risks have been moderating as businesses reopen, border restrictions ease and the local economy continues to recover.
However, EY says this positive outcome is tempered by the ongoing economic uncertainties, particularly inflationary pressures. Although the increased level of high debt-to-income lending also sounds a note of warning, household balance sheets are generally in good shape, with many households having built up substantial buffers on their mortgages.
Other pressures remain, with net interest margins (NIM) declining across all the banks – down to an average of 1.75 per cent – driven by a low interest rate environment and exacerbated by intense competition and an unfavourable mix of fixed-rate mortgage loans.
These headwinds look set to continue into the second half of the year, although the outlook is a little brighter in light of the recent the cash rate rise.
“While margin compression is likely to continue in the short term, the rising interest rate cycle should ease NIM pressures and lead to improved profitability for the banks over the medium term,” says Tim Dring, EY region banking and capital markets leader, Oceania.
“However, ongoing economic risks point to continued uncertainty for the banking sector’s outlook. Last week’s higher than expected rise in the official cash rate by the Reserve Bank of Australia and future expected rises, offer top-line revenue growth opportunities and earnings upside.
“On the flip side though, rate rises coupled with strong inflation could also put pressure on asset quality and slow credit growth, and continued mortgage competition may also reduce margin upside for the banks. In the current economic environment, the only real certainty for the sector is uncertainty.”
In the face of ongoing profitability pressures, Dring says managing margins will remain a key area of focus for the banks for some time yet.
“The half-year results show the banks have continued to execute well on their expense management initiatives, although costs remain elevated due to ongoing compliance, regulatory and technology programs, with the need for additional resources to meet loan demand and to address cybersecurity and financial crime risks.”
“Reducing the cost base remains a challenging task, given traditional operations silos, complex legacy systems and the need to respond to ever-evolving regulatory requirements. This is contributing to the banks’ struggle to transform their banking operations with an integrated, holistic approach that leverages data and analytics to inform risk management and, perhaps most importantly, enable the banks to form a forward-looking view of risks and opportunities.”
Looking ahead, Dring says economic pressures point to continued uncertainty for the banking sector, despite the expectation of a rising cash rate that should help ease the pressure on margins and boost the banks’ profitability.
“This highlights that banks cannot afford to take their foot off the accelerator when it comes to their strategic cost management and operations transformation.
“The banking sector is moving from an era of large multi-year transformation programs, to one of building capabilities to manage continual change and create more sustainable, future-ready organisations.
“In this environment, following through on simplification, innovation and digitisation strategies will be key to the banks boosting their efficiency, improving customer experience and remaining competitive against disruptive new players.”