Earnings and returns
Cash earningsCash earnings fell to $30.7bn ($30.8bn excluding the impact of acquisition notables), which was a drop of 5.4% from the record $32.4bn set last year. NIM decreased over the year, which was not quite offset by increased loan volumes. Operating Expense increases weighed on results, increasing 6.5% to $43bn (exc. notables) - a record high for the banks. Credit expenses were lower on the prior year, with low loss experience continuing to support results. Earnings continued to moderate in 2H24, down 1.7% on 1H24.
ROE fell 79bps to 11.1%, down from 11.9% in the prior year (which was a 5 year high). A decrease in cash earnings was the key driver with average equity levels also rising marginally. ROE also continued to moderate into 2H24 (falling 19bps from 1H24).
Australia’s major banks reported combined cash earnings of $30.7bn in 2024 – a fall of 5.4% from the record high of $32.4bn set in FY23. The result shows how the tailwind of rising cash-rates that drove record earnings in 2023, rapidly faded as competition and rising costs moderated returns. Net Interest Margin (NIM) fell approximately 6bps year-on-year, albeit with signs that this decrease was arrested through the second half as banks made volume/margin tradeoffs. Margin contractions were partially offset by loan growth which came in at 3.4% on an annualised basis (and approximately 5.6% if including the impact of acquisitions during the year). While mortgage market share fell slightly, business credit growth was again a standout, with overall system business-credit growth of 7.5% and with the majors increasing their share. The combination of margin decline and balance-sheet growth saw Net Interest Income more or less flat over the year (down 0.4%).
Revenues
Net interest income (ex notables)Increased NIM pressure weighted on Net Interest Income during the period, resulting in a 0.4% decrease to $74.6bn (albeit this falls within our definition of ‘flat’). Whilst NIM decreased, NII was supported by an increase in GLAA volumes which helped to mitigate some of the margin pressure. Hoh NII recovered modestly, increasing by 1.2% on 1H24 to close out the year.
Non-Interest Income rose marginally over the period to $15.4bn (falling within our definition of ‘flat’), being an increase of 0.4% year-on-year. Fee & Commission income remained the biggest contributor, and was also largely flat over the year.
The other significant driver of the earnings decline was costs, with operating expenses climbing 6.5%, and setting a new record high of $43.2bn (excluding notables). Significant growth in technology spend as well as inflationary pressures for people costs were key drivers of this increase, with the expense-to-income ratio for the year being 48% (up from 45% in the prior period, excluding notables), being the highest in over a decade. Other Operating Income (OOI) was more or less flat over the period, coming in at $15.4bn and representing 17.1% of Total Income (excluding notables).
RoE for the year was 11.1% which was down 79bps from the prior year (which was a 5 year high). This is perhaps unsurprising given the drop off in earnings and with elevated capital levels net of share buy-backs completed during the year. Nevertheless, the banks remain around 2.5% short of the 13.6% RoE recorded in FY17 (being the last time RoE exceeded 13%) as long-term structural challenges continue to play out.
Low credit losses supported the results again as bank customers continued to show resilience to a slower economy and sustained higher cost of debt. Credit provisions on the balance sheet rose modestly to $21.4bn (excluding acquisitions), up from $20.9bn in the prior period with overall provision coverage ratio remaining broadly flat again at 66bps.
Credit expense was $2.2bn (excluding acquisitions) for the year (which was 20% lower than FY23). The key drivers of the expense were a combination of balance sheet growth (and therefore an organic increase in provision) and an increase in Stage 3 individual provisions. Whilst this suggests further signs of stress appearing, given total provisions represent 2.38 times (excluding acquisitions) current impaired assets, the banks remain well provisioned for the residual uncertainty that the economic cycle brings.
Lending
Net interest marginNIM was down during the year, with strong competition in the mortgage market continuing to put pressure on lending margins. Funding costs also rose, with depositors switching to higher returning products and increases in wholesale funding costs. Increased contributions from capital investments were not enough to offset these headwinds. NIM did improve in 2H24 however, as banks moved to protect margins and described selective action to manage volume/margin tradeoffs.
Lending growth remained positive over the period, however at 3.4% (which excludes the impact of acquisitions during the period), this was down 131bps year-on-year. Lending growth did pick up in the second half however, with 2H24 seeing an annualised 248bps increase on 1H24 (also excluding the impact of acquisitions) - with business lending being the fastest growing segment during the period. Lending growth over the year was ~5.6% including the impacts of acquisitions.
The strong but tightening results also demonstrate the strategic tensions facing banks around the world and that in many markets are causing deep reflection on the need for reinvention in the sector. The pinch is how banks manage near-term performance with continuing their response to the longer-term trends that may call for broader reinvention.
In the near-term, banks globally face a squeeze from both ends and as the ‘commodity trap’ we have proposed continues to bed in. Competition remains intensified within a much more concentrated set of profit pools following decades of simplification and focus, while economic growth (and particularly asset-price appreciation) cannot be relied upon to fuel balance sheet momentum. At the same time, efficiency (costs) has remained structurally stubborn despite high levels of focus and as investment needs from technology and regulation endure, meaning banks around the world have seen no fundamental shift in their costs. In combination, shifts in returns from ‘the core’ are likely to come from operating discipline and exceptional execution – both likely sources of outperformance in the coming years.
And longer-term (though requiring thinking now), banks also need to respond to system-wide trends that have built, taken hold and are likely to accelerate – in particular the enablement and disruption from technology, shifting customer preferences (a topic we will soon analyse in a global survey of banking customers), regulation and the broader redistribution of value pools as the world banks serve reconfigures itself.
These twin challenges – completing the optimisation of current business models – through simplification and modernisation – while responding to trends that may call for reinvention are at the heart of what many in global banking are describing in dramatic terms. While the symptoms may not be as acute in Australia and for our major banks, not least due to our market structure and economic strength – we already see them driving deliberate and discerning choices for our banks.
Expenses
Operating expenses (ex notables)Operating expenses hit a new record high during FY24, closing the year at $43.2bn which was up 6.5% on the prior year. Significant growth in technology spend as well as general inflationary pressure were key drivers of this increase, with the expense-to-income ratio for the year landing at 48% (up from 45% in the prior period, excluding notables). Expense growth continued into 2H24, up another 3% on 1H24.
With flat NII and operating expenses up on the prior year, the expense-to- income ratio increased around 308bps from FY23. This represents the highest ETI ratio in the last decade (excluding notables). Growth in 2H24 was more or less in line with 1H23, with higher expenses being offset by higher NII.
In response, that is why we see, and expect to see more and more, examples of banks, whether large, incumbent or not considering the scenarios for the industry’s future. These banks will make bolder strategic bets on where in the value chain and for which customer segments (be that defined by features or needs) they see genuine advantage and differentiated opportunity for growth.
We will explore these strategic archetypes and how to deliver them in our upcoming global study of Retail and Business banking, including a significant survey of customer and leader views in the sector. Many may seem familiar (below we introduce a selection of them) however creating true differentiated value will require choices on which archetype is best for which business-line (in a portfolio universal bank) and may lead to a choice away from where things sit today.
Asset quality
Credit impairment expense (ex acquisitions)Credit expenses was $2.2bn (which excludes the impact of acquisitions). The key drivers of the expense were a combination of balance sheet growth (and therefore an organic increase in provision) and an increase in Stage 3 individual provisions, with some signs of stress appearing. Unlike the prior year, where the credit impairment expense was driven by changes in future expectations of the outlook. Including the impact of acquisitions, credit expenses were ~$2.5bn.
Credit provisions were up 2.8% from FY23 (excluding the impact of acquisitions) which we consider ‘flat’. The increase reflected an increase in GLAA during the period (which attracts an increase in ECL provision), and increases in stage 3 provisions. This, combined with 90+ DPD indicators increasing over the period suggests borrowers are increasingly becoming distressed - however these levels are still within what the banks describe as their expectations.
To be truly transformative, these choices are also likely to mean investment in capabilities that differentiate, which in and of themselves may feel challenging to contemplate during a time of such discipline and execution and having spent improving the core of the business.
For well over a decade, global banking, including in Australia, has been characterised by becoming simpler, safer and more stable - which has served us all incredibly well. While this focus on discipline and execution remains critical, reinvention is likely to see bigger bets on topics such as:
Again, these may not seem novel, but considering the change that might be required, banking leaders may have to hold apparently competing mindsets in tension.
The good news for the Australian major banks is that their performance and strength represents a coiled spring to deliver on this kind of ambition.
Balance sheet
Provision coverThe provision coverage ratio was broadly flat again at 66bps, with total provisions (up 2.8% to $21.4bn) largely in with growth in GLAA (up 3.4%) over the year.
CET1 decreased 12bps (which excludes the impact of acquisitions). The impact of acquisitions would have decreased the CET1 level a further 5bps. Total capital levels (including impact of acquisitions) continued to increase, climbing ~2.0%.
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Barry Trubridge
Partner, Customer Transformation and Financial Services Industry Lead, PwC Australia
Tel: +61 409 564 548
