Major Banks Navigate Earnings pressure as competition, costs pull earnings back from rate-hike record

Friday, 8 November 2024

PwC Australia’s Major Banks Full Year 2024 Analysis finds that the Major Banks’ cash earnings fell to $30.7bn, down 5.4% from the record high of $32.4bn last financial year. Return on Equity (RoE) declined to 11.1%, down 79 basis points from the prior year, reflecting the drop in earnings and elevated capital levels.

This decline showed how the tailwind of rising cash-rates that had driven record earnings in 2023 rapidly faded as competition and rising costs moderated returns. Net Interest Margin (NIM) fell by 6 basis points year-on-year, and was 9 basis points lower than the recent peak in 1H23, with only minor improvement in the second half of FY24. 

Sam Garland, Banking and Capital Markets Leader at PwC Australia said, “Despite FY24 being one of the best results for the majors in recent memory, it also showed how the significant increase in cash rates since 2022 has provided no lasting respite from the extent of competition in Australian banking.”

“Two and a half years since the first rate hike, and almost a year since the cash rate reached the current level of 435 basis points, at 1.81 per cent major bank margins are only marginally higher than their record annual low of 1.77 per cent just prior to the tightening.” 

The fall in margins for the year was almost offset by resilient credit growth. Excluding the impact of acquisitions, lending grew 3.4% for the year. This was a mixed story for the majors, who saw market share fall slightly over the year but with strong growth in business-lending.

“The growth in business lending clearly shows the strategic priority that business-banking has for all the majors as they hope to both increase growth and sustain higher-margins in a less commoditised customer set.” Mr Garland said

However, operating costs grew 6.5% to a record high of $43.2bn, weighing on the results. This was driven by general inflation and increased technology spend as banks continue to invest to modernise. Coupled with the decline in income, the expense-to-income ratio for the year climbed to 48%, up from 45% in the prior period.

“The expense-to-income ratio for the banks was the highest level in the last decade (excluding notable expenses) and makes clear the tension between continuing to invest in areas such as technology and regulation while generating optimal returns in a lower-margin environment.”

Low credit losses again supported the results, as the banks’ customers continued to show resilience to a slower economy and higher cost of debt. Credit expense fell $573m on the prior year to $2.23bn and provisions for credit losses sit at $21.4bn (both excluding the impact of acquisitions), with signs of stress appearing stronger, but no banks appearing alarmed.

"Bank customers have remained remarkably resilient in a softer economy and following the fastest rate tightening in history. While the banks reported some spikes in problem-loans, this was well within their expectations," added Mr Garland.

PwC Australia’s analysis suggests that the strong but squeezed results for the majors show the strategic tensions facing banks around the world as they manage near-term performance with longer-term trends.

“The banking sector globally is facing significant pressure as results become squeezed from both ends - intensified competition across a more concentrated set of profit pools, while costs have seen no structural shift as investment needs from technology and regulation endure,” Mr Garland said.   

“In that context, banks face the twin challenges of completing the optimisation of their current business models - through simplification and modernisation - while responding to trends that may call for reinvention - particularly the impact of technology, customer preferences, regulation and shifting value pools.”

Mr Garland notes this will see banks becoming even clearer on the roles they want to play and the capabilities they need to win in these chosen priorities, and may need to challenge some mindsets.

“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 absolutely critical, reinvention is likely to see bigger bets on topics such as diversification, ecosystems, personalisation, unlocking data and structural changes to the cost base,” he said.

“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.”

Key data points:

• Cash earnings fell to $30.7bn, down 5.4% from the record high of $32.4bn in FY23

• Net Interest Margin (NIM) fell by approximately 6 basis points (bps) year-on-year, but positive growth was seen in the second half of FY24

• Whilst NIM was down from the prior year, Net Interest Income (NII) was somewhat supported by loan growth which came in at 3.4% (excluding acquisitions)

• Banks operating expenses climbed 6.5%, setting a new record high of $43.2bn

• Expense-to-income ratio for the year was 48% (up from 45% in the prior year, excluding notables)

• The Return on Equity (RoE) was 11.1%, down 79 basis points from 11.9% in the prior year. 

• Credit provisioning on the balance sheet is at $21.4bn (excluding acquisitions), up from $20.9bn - now at the second highest level since covid.

• Lending growth slowed to 3.4% (also excluding acquisitions), down 131 bps - driven by mortgages which continue to grow more slowly than business lending. 

• The Common Equity Tier 1 (CET1) ratio was 12 bps points lower at 12.4% (excluding acquisitions)