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Digitisation remains key growth driver

Digitisation remains key growth driver

(13 November 2018 – Australia) Digitisation remains a key focus for major banks as regulatory costs and capital adequacy pressures were highlighted repeatedly in 2018 annual bank reporting.

Improving processes and customer service through better digital experiences and smarter use of data presents as a key opportunity for the Big Four after a disappointing results season according to major consultancy groups analysis. Annual results from the four major banks demonstrate that the big banks face pressure for the foreseeable future as a result of remediation-related cost increases and slower income growth.

Headline cash earnings for the Big Four slid by over five percent from A$31.2 billion to A$29.5 billion in 2018. Lending growth remains relatively subdued at three percent as ongoing regulatory changes, negative sentiment and trust concerns and ongoing fallout from the royal commission running its final round of hearings with CEOs and chairmen this week. Competition from non-Big Four Australian banks and non-bank Fintech providers were also cited as key competitive challenges in conjunction with conduct challenges, customer remediation and the shift to open banking requirements by mid-2019.

Deloitte’s analysis declared that in aggregate, personnel costs make up more than half the four banks’ total expenses; technology a fifth; and other costs, including restructuring, remediation and regulatory costs, taking up almost a fifth. Occupancy costs made up the remaining ten percent of costs. Conditions look set to continue into FY19 as well as facing the royal commission and the need to remediate and adapt their regulatory and compliance resourcing and structures, the banks are continuing to meet changing customer preferences and respond to digital disruption. KPMG’s Major Australian Banks Full Year Analysis Report recognised that majors were repositioning their business models for the future” by “adapting their business mix, product portfolios and distribution strategies in response to the evolving operating and regulatory environment. 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 and Trade-offs will inevitably need to be made.

EY suggested that the mandated roll-out of open banking in July 2019 would increase these pressures further, while a renewed focus on new policy initiatives would increase competition in the sector from both sides of the political aisle. In this environment, banks will need to bolster their financial performance by improving cost discipline, utilising technology to drive sustainable cost efficiencies and focusing on margin management to sustain revenues. PwC’s 2018 Major Banks Analysis noted that the major banks are all simplifying, streamlining and rethinking their business architecture. Excluding CBA who reports out of time with ANZ, NAB and Westpac, investment spend overall is up by 34.7 percent year-on-year and 16.8 percent half-on-half, reflecting the significant increase in investment in customer service technologies in the first half of the year which is expected to continue. EY’s analysis of the big four banks’ 2018 full-year results noted the cost-to-income ratios ticking up due in part to slowing revenue and upward cost pressures.

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