Banks hunt for growth amid economic headwinds

EY analysis of the 2023 full-year results of Australia’s major banks

• $31.99 billion in combined statutory earnings across the four major banks, up $2.43 billion from the 2022 full-year results, an increase of 8.2%
• Average net interest margins increased 11 basis points from the 2022 full-year, to 1.85%
• Return on equity across the big four banks increased by an average of 125 basis points from the 2022 full-year, to 12%
• Credit impairment charges increased $2.96 billion, from a net write-back of $0.13 billion at the 2022 full-year, to $2.83 billion this period

Australia’s major banks have delivered a strong set of results for the 2023 full-year, with cash rate rises and the net interest margin peak flowing through to higher revenues, despite highly competitive pricing during the year. However, economic headwinds and slowing loan momentum point to increasingly challenging times ahead for the sector, with banks on the hunt for new sources of growth according to the latest analysis from Ernst & Young, Australia (“EY”).

The EY analysis of the big four banks’ 2023 full-year results found their combined statutory earnings were up 8.2% from the same time last year, to $31.99 billion. These increased earnings have also underpinned improved return on equity, which increased 125 basis points to an average of 12% across the banks. But multiple signs suggest future revenue and earnings are likely to moderate, with inflationary pressures and falling household consumption having an impact.

Doug Nixon, EY Oceania Banking and Capital Markets Leader said: “The banks, like consumers, are facing some tough market conditions ahead. With mortgage profitability continuing to tighten, the banking sector is hunting for growth outside retail lending, in areas such as business lending, and looking to optimise funding and operational costs.”

“Tighter financial conditions and serviceability requirements have seen residential mortgage demand slow significantly over the twelve months to September 2023. So, while mortgages have long been the traditional Australian banking sector growth engine, the current environment has put business lending firmly back on the banks’ agendas,” Mr Nixon said.

“The banks are also looking at funding, including the deposit markets. To gain a competitive edge in this space though, banks will need to revisit their deposit strategies, including which customer segments to target. At the same time, the banks will need to do more to close the customer expectation gap, by providing engaging, hyper-personalised and frictionless experiences.”

Balance sheets remain strong, with only modest asset quality deterioration

“To date, mortgage stress among the major banks’ borrowers has risen only modestly and the number of borrowers behind in their loan repayments remain at low levels. However, the full impact of rate increases on credit quality is still to play out. With cost-of-living pressures mounting, the banks will need to carefully monitor any increase in arrears and defaults over the next year, making full use of their front line and collections capabilities and stepping up their support for customers facing financial hardship where needed.”

“But the banks have maintained confidence that asset quality will weather the challenging economic environment and, enabled by robust capital ratios, they have continued to provide sound returns for shareholders,” Mr Nixon said.

Inflationary pressures make cost management more difficult

“While cost-to-income ratios improved across most of the banks for the 2023 full-year, they are still facing cost pressures on multiple fronts, notably including wage inflation and the need to attract scarce, and therefore expensive, tech talent. Increasing IT vendor costs and significant risk and regulatory costs, particularly in relation to cyber security and fraud prevention, are also having an impact,” Mr Nixon said.

“Striking the right balance between revenue, customer service, and risk, while also effectively managing cost, remains tricky and it’s crucial that banks look at this through a multi-year lens – to ensure that today's cost reduction measures don't hinder tomorrow’s business needs.”

-ENDS-

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Key Contacts:
Rebecca Aley   
Ernst & Young Australia
+61 418 835 849
rebecca.aley@au.ey.com