Tough year ahead for big four – report

by Mark Rosanes18 Jan 2021

Australia’s big four banks – ANZ, CBA, NAB, and Westpac – will need to rely on their corporate and mortgage lending businesses to boost profitability this year, according to an S&P report.

This comes as the country’s major banks have either sold or are looking to unload their wealth management and insurance divisions following the Royal Commission’s disclosure of their misconduct and consumer rights violations in early 2019.

Martin North, founding principal and banking sector analyst at Digital Finance Analytics, told S&P Global that the big four are “banking on future growth from their lending, especially mortgage divisions.”

“Future profitability is also being crunched by lower interest rates, though offset by cheaper finance from the Reserve Bank of Australia (RBA),” he said.

S&P revealed that the aggregate cash profit of the major banks dropped by 36.6%, from $27.4bn in 2019 to $17.4bn last year. The decline was primarily attributed to higher loan-loss provisions and customer remediation costs.

Year-on-year net interest margins also decreased to between 1.63% and 2.07% from a range of 1.76% to 2.09% as the RBA slashed cash rates to a record low 0.1% to soften the financial impact of the pandemic.

The interest rate, which the central bank said will remain at the current level for the next three years, has prompted banks to lower fixed mortgage rates to compete with non-bank lenders.

Additionally, major banks are facing higher compliance costs that will likely be implemented in the next five years.

The government has delayed carrying out some recommendations from the Royal Commission that were scheduled to be introduced in Parliament last December to June this year due to the COVID-19 pandemic. The Australian Prudential Regulation Authority (APRA) has also deferred the implementation of the Basel III reforms from January 2022 to January 2023.

A recent report by KPMG obtained by S&P showed that the cost-to-income ratios of the big four banks in the fiscal year 2020 have risen from 47.2% to 53.2%, mostly because of client remediation and IT-related spending.