ANZ has the most room and the greatest commitment to move on costs. The Commonwealth Bank has more optionality than Westpac, but responding to Austrac’s money laundering charges could hinder.
National Australia Bank’s cost levels look similar to peers, suggesting it needs to reinvigorate revenues. This is the view of Morgan Stanley analyst, Richard Wiles, who is optimistic about the outlook for the major banks in the near term because earnings should prove resilient.
“We expect margin improvement from home loan repricing and deposit tailwinds to offset slowing volume growth; good cost control, and broadly stable credit quality, with potential for another low loan loss charge," he said.
In his latest client note, Wiles takes a look at the banks’ cost control efforts and examines expenses using two separate methodologies to guard against rounding errors.
Cost-to-income is the classic measure of efficiency. However, according to the analyst, it can be distorted by differences in revenue.
Hence, he cross-checks via banking costs (ex wealth costs) to footings (BCF), which is essentially expressing costs as a percentage of total loans and deposits. Incidentally, footing is an accounting term which in essence refers to a more robust and diligent way of verifying figures.
“While not perfect, this measure reflects how efficient a bank is in gathering its loans and deposits footprint.”
Room to move
ANZ has the most room to move on costs as it is the least efficient major bank, both on a cost-to-income basis at 46 per cent as well as on a BCF of 74 basis points.
According to Wiles, this is partly due to the lender’s Asian Retail & Pacific operations, but even excluding these, ANZ's cost-to-income ratio is a high 44 per cent and BCF at 71 basis points - above those of its peers.
“While ANZ has delivered the largest reduction in BCF since 2015 - down 5 basis points - we think it has a greater commitment to managing expense growth in the near term, with a focus on flat absolute cost growth, and can reduce its cost base to $9 billion by 2019," he said.
Conversely, the other banking majors have less room to move on costs. CBA has a cost-to-income of 41.5 per cent, which is at the bottom end of the peers range, although this is largely due to strong revenues.
Yet on his more insightful BCF analysis, CBA at 68 basis points is similar to NAB and lags Westpac. This suggests to Wiles that CBA could respond to any earnings challenges by increasing its focus on costs, but Austrac and process remediation costs may hinder.
At 42.5 per cent, NAB has an above-average cost-to-income ratio but its BCF of 69 basis points is average. “NAB has made limited progress on efficiency since 2015, suggesting that NAB's key challenge is revenue growth.”
Westpac is the most efficient bank on both a cost-to-income and BCF basis at 41.5 per cent 65 basis points respectively, and this is not driven by its larger-than-peers' institutional bank.
“This suggests that further efficiency gains are harder for Westpac.”