Australian major banks – strong results, but for how long?

KPMG analysis finds that the Australian major banks (‘the Majors’) have reported strong financials for the first half of 2023, driven by continued growth of the loan portfolio and improving net interest margins.

KPMG’s Australian Major Banks Half Year 2023 Results Analysis finds that the Majors reported a combined cash profit after tax from continuing operations of $17.0 billion, up 16.6 percent on 1H22.

The RBA’s tightening of monetary policy was the key driver of net interest margins increasing by 14 basis points on 1H22 to an average of 190 basis points. Consequently, net interest income increased by 17 percent compared to 1H22, to $37.7 billion.

While margins have now returned to levels not seen since 2019, and interest earning assets increased by 8.6 percent from 1H22, margins are under pressure from both intense pricing competition in the home loan market, and a significant increase in interest expense to $46.1 billion, up from $8.7 billion in 1H22 and $14.3 billion in 2H22, driven by the rising cost of deposits and wholesale funding.

Steve Jackson, KPMG Australia’s Head of Banking & Capital Markets commented: “In this reporting period we see the Majors have grown both the volume and profitability of their loan books. However, this is now being offset to a degree by the more than 400 percent increase in interest expense compared with 12 months ago, driven by the rising cost of deposits and wholesale funding.”

Average provisions as a percentage of gross loans decreased by 3 basis points from 1H22 and is 1 basis point higher than the end of 2H22. The Majors have increased their impairment charges when compared with 1H22, particularly the collective provision which was still being written back in 2022. While specific provision charges are relatively stable, the collective provision increase reflects ongoing inflationary pressures, rising interest rates and a continued softness in the economic outlook.

While credit quality remains strong, with delinquencies at their lowest level since 2018, through increases in the collective provision the Majors are signalling the potential for an economic slowdown, increasing unemployment and further falls in house prices.

Rising costs continue to challenge the Majors. The average cost-to-income ratio decreased from 49.3 percent in 1H22 to 44.3 percent. Overall, however, operating costs have increased compared to 1H22 by 2.6 percent. The decreasing CTI ratio is due to income growth outpacing cost growth, rather than costs falling in absolute terms.

Employee expenses increased by 4 percent during the half-year, after remaining relatively flat during FY22, on the back of a 3 percent increase in headcount. In addition, technology spend increased by 3 percent. Investment spending has been relatively stable across the Majors. However, there has been an overall shift away from risk and compliance investment spend, with an increasing share of investment in productivity and growth initiatives.

Steve Jackson added: “The Majors’ overall cost base continues to rise, despite significant investment in digital capabilities. In this period the increase in revenue has outpaced the growth in costs, but there clearly remains a significant opportunity for the Majors to decouple headcount and cost growth from revenue growth.”

In terms of capital and liquidity, liquidity positions across the Majors are well above regulatory minimums of 100 percent although the average Liquidity Coverage Ratio (LCR) decreased to 131.0 percent, down 100 basis points from 2H22. Balance sheet strength has remained a core focus for the Majors with average CET1 of 12.3 percent, an increase of 62 basis points compared with 2H22, driven by a significant fall in share buy-back activity compared with 1H22.

“While the headline results for the period are positive for the Majors, there are early signs of stress in the loan portfolio as a result of the soft economic outlook. With interest rates elevated, the Majors are seeing a margin benefit, but this is being eroded by a combination of loan pricing competition, funding cost increases and a continued rise in bank costs.” said Jackson.

• The Majors reported a combined cash profit after tax from continuing operations of $17 billion for the half year, an increase of 16.6 percent on 1H22 and 22.9 percent on 2H22. This result reflects strong growth in housing credit and increasing net interest margins compared with 1H22 on average across the four Majors.
• The average ratio of impaired loans continued to decrease in 1H22 to 0.21 percent, down 6 basis points from 1H22 and 2 basis points from 2H22. Over the half year, 90-day delinquencies have also continued to decline.
• The average net interest margin (cash basis) of 190 basis points increased by 14 bps compared to 1H22, and 10 bps compared to 2H22. As such, the Majors’ HY22 results include a significant positive impact of increased interest rates. However, the average margin is still below FY19 by 5 bps.
• Cost-to-income ratios have decreased from an average of 49.3 percent in 1H22 to 44.3 percent. Operating costs increased by 2.6 percent to $20.2 billion, reflecting an increase in personnel costs and investment spend, although offset by lower remediation and provisioning costs.
• The Majors continue to have strong capital buffers, with the average Common Equity Tier 1 (CET1) ratio increasing by 62 bps over the half-year to 12.3 percent. The strong capital position saw two of the four Majors announce share-buy backs totaling $1.9 billion during the half, in a move to deliver stronger returns to shareholders.
• The average interim dividend per share of 111 cents was an increase compared with 95 cents in 1H22. Dividend pay-out ratios decreased slightly to an average of 65.2 percent.

Ashford Pritchard
apritchard2@kpmg.com.au
0411 020 680