Major Banks Analysis: Half-Year

Transcript

PwC’s Banking Matters Insights

Sam Garland:

Australia's four major banks have just announced their first half '23 results, and it's a record set of results that was delivered with limited enthusiasm and a set of results that we think reemphasizes the need for discipline and for diversification. As I said, the results were a record $17.1 billion of cash earnings and an increase of $3 billion on the prior half. The prior record was in 2015. That's a return on equity of 12.6%, well above the levels that we've seen since the simplification era began and at a level that we didn't expect, honestly, that we would get back to in Australian banking.

What's underneath that result? The first driver is, as everyone would expect in this environment, margins. With a 350 basis point increase in the cash rate in the 10 months to March, the banks' net interest margins have widened by 14 basis points in the half to 1.91%. That's a good result, but it's also shorter and smaller than people expected it to be, and that's a function of the competitive environment that the banks are facing on both, the lending and deposit side of the balance sheet, and something that the banks have signalled indicates that their NIMS have peaked as a result of this change in the cycle.

The second major driver in the result is balance sheet growth. Lending growth for the majors was 4.8% for the half. That's a pretty respectable growth rate, but in reality, it's far lower at a market level than it has been historically, where we've been above 10% on a number of metrics. Third key driver is notable expenses, and predominantly that's in relation to $1 billion charge in the prior half, which hasn't reoccurred this half and therefore has improved earnings for the majors as a whole.

On the cost side, despite a lot of talk of inflation, the cost story is actually pretty good. Overall operating expenses rose by 2.7% for the half, and that's despite an increase in personnel costs of between seven and 8% in the half, which really demonstrates that productivity initiatives are delivering around occupancy and technology in particular. Finally, coming to credit impairment expense, well, that returned to something that we might consider more normal for the half at $1.4 billion, which is $1.3 billion higher than it was a half ago.

Provisions are just over $20 billion, and that really reflects provisions for losses that are expected or anticipated in the different economic environment rather than any real deterioration in actual losses that the majors are experiencing today. Overall, a record result but delivered with limited enthusiasm, and we think that reflects four transitions that are taking place in the world. The first of those is the economic transition around monetary policy and interest rates in particular. The second is around the energy transition and the opportunities and threats that that represents.

The third is around digital and technology transition, which we've heard a lot about in recent weeks, and the final is around fiscal transition, which we will hear much more about tomorrow as the budget is announced. The implications for the majors as we see them in the near to medium term centre on four particular areas, which we've summarised as discipline and diversification. The first of those four that we expect to see in focus is this continued squeeze on the core of the business.

As the majors have simplified their businesses, they have become more prone to competition, the threats around cost management become even more important, and we're entering into a period where credit losses are likely to increase. The second of those major themes that we're looking out for in the result is around doubling down on digital, both in terms of completing the cloud transitions and the cost benefits that come from that, that we've been hearing about for many years, also moving into broader, larger core banking transformations that we've been expecting, and then finally some of these new technologies and the opportunities that they represent, in particular, artificial intelligence.

Third in our list of four is around diversification revisited. As the majors have simplified those businesses, the foundation of revenue and earnings has narrowed and we expect them to look now to diversify again, whether that be through services, acquisitions, or even reentering the field of wealth. Final and most important topic is around reputation and resilience. We're entering into an environment where more customers are inevitably going to need help and support, and that's going to be a big test and a big opportunity for the majors to reinforce their reputation.

We're also in an environment where the resilience of systems, processes, technology, security is absolutely critical, whether that be through scams, cyber, data security. Finally, we believe we're entering into a regulatory environment that is going to be more difficult with higher expectations of banks, both because of new leadership and regulators and the overseas environment around the regulation of banking. It's going to be a fascinating period ahead, and we're looking forward to talking to you more about that.