Majors’ profits fall in restructures

Research shows banks spending on restructuring, legal costs and continued investment

Majors’ profits fall in restructures


By Rebecca Pike

New research has shown the four major banks have reported a decrease in aggregate cash profits as they restructure their business models.

The KPMG’s Major Australian Banks Full Year Analysis Report 2017-18 found the majors reported a cash profit after tax from continuing operations of $29.5billion, down 5.5% from the year before.

The group said this result underscores a challenging regulatory and operating environment for the banks, as they have each been seen to ‘simplify’ their businesses over the last year.

The majors face slowing revenue growth, rising capital levels and increasing legal and remediation costs, at the same time as the industry works to rebuild trust with stakeholders.

Ian Pollari, KPMG Australia’s head of banking, said, “In the face of a number of structural factors impacting the banking industry simultaneously, the majors are executing against their restructuring and simplifications programs in order to reposition their business models for the future.

“They are adapting their business mix, product portfolios and distribution strategies in response to the evolving operating and regulatory environment.” 

While remediation, legal and regulatory costs have risen substantially as a proportion of the major’s total expenditure, the banks need to balance this spend with continued investment in digital and technology innovation in the face of growing threats from new players.

This is especially relevant given the introduction of changes to the ADI licensing regime and Open Banking, which are intended to stimulate greater competition in the market.

Hessel Verbeek, KPMG partner, banking strategy, said, “Not only have the various compliance and remediation costs translated into higher cost-to-income ratios, the majors’ investment spend in risk and compliance projects is also up strongly and in most cases investments on growth initiatives has decreased in a relative sense.

“If this redirection of investment towards regulatory compliance continues over a protracted period of time and the majors are unable to maintain their historical levels of investment in digital and other competitive initiatives, it could impact on the level of innovation that Australian consumers and businesses are accustomed to from our banking industry. Trade-offs will inevitably need to be made.”

KPMG’s report looked into figures like housing credit, which recorded credit growth in the full year of 3.3%, compared to non-housing credit which grew by 2.9%.

The major banks’ aggregate charge for bad and doubtful debts decreased by $702m to $3.3b (statutory basis) for the full year (down 17.7% on 2017), with lower individual credit impairment charges, partly offset by an increase in collective provisions for some of the major banks.

The full report is available on the KPMG website.

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