How mortgage business is leading the economic recovery for the Big Four

by Mike Wood14 May 2021

The first half year financial results of Australia’s biggest banks exceeded all expectations: despite the pandemic, profits were up across the board and pundits were left with egg on their faces.

The top line results were spectacular, with a $13.8 billion in cash earnings across the four banks and a 10.3% return on equity the big takeaway.

For Sam Garland, Banking and Capital Markets Leader at PwC Australia, the results were more than encouraging.

“At a high level, results of $13.8 billion for the Half is a pretty dramatic turnaround from six months to a year ago” he said. “The big drivers of that change are credit losses, which swung nearly $6 billion versus a year ago. That’s predominantly down to the fact that the economic outlook has improved, and to date, there haven’t been major losses as a result of the COVID-19 experience.”

“It’s also majorly down to the fact that economic assumptions have changed. The core assumptions around provision levels have been adjusted to reflect the outlook. The other major change year on year has been a significant reduction in notable items: the cost of remediation and simplifying or restructuring the business, which were down about $1.5 billion.”

Lending increases have played a massive part in the recovery.

“Underneath the broader results: mortgage lending growth is starting to bounce back,” explained Garland. “Overall, lending growth for the majors was pretty moderate for the Half, but if you get into the underneath, mortgage lending, particularly owner-occupier, is returning to levels that existed pre-COVID. Investor is a little bit lower but still returning, and more recently really bouncing back. Business lending has a small recent uptick, but it’s still very low relative to recent levels.”

“Mortgage Lending remains a fundamental driver of core earnings and growth prospects. I think it’s a significant part of the majors’ business, as are SME and institutional lending. It remains a feature of the simplification that has been taking place over the last 5-7 years: returning to those core banking propositions. It’s actually become more and more important as part of the revenue streams for big banks.”

The results of the Big Four banks are often a good way of reading the general health of Australian banking.

“I think everybody is looking at these sets of results and saying that it is remarkable to see a turnaround of this size when we think what we were contemplating a year ago,” said Garland. “Frankly, that’s great news, because it’s great news about the Australian economy and how quickly it’s bouncing back. It’s also great news because, to date, the losses have not been significant."

“It’s really important to acknowledge, though, that most of that change in impairment losses is driven by changes in assumptions on economic environment, and it’s very early to be calling the pandemic over.”

“JobKeeper has only recently rolled off – in fact it ended at the end of the period that we’re talking about (when FH21 ended) so you would not have expected real losses to have come through yet. There remains a lot of uncertainty in the output, but certainly these results are much better than anyone would have expected 12 months ago.”