Australia’s Big
Four banks once again delivered a stellar performance for the year
amid a precarious market environment that embodied regulatory
concerns, moderate economic conditions and wavering investor
confidence. The banks year-on-year combined headline cash earnings for
2014 increased by close to six percent, reaching an impressive A$28.6
billion.
Modest expansions in core business sectors, reduced bad debt and
growth in regional earnings were the main profit drivers for the
banks, albeit with varying degrees of success.
This year, ANZ’s unique regional strategy distinguished the bank from
its competition. Leverage from fast-growing Asian economies resulted
in a 25 percent increase in reported cash profit from its
international division, which combined with Australia and New Zealand
franchises boosted ANZ’s fiscal earnings by 10 percent to A$7.1
billion.
In contrast to ANZ’s ‘super regional’ strategy which successfully
captured regional growth opportunities, NAB has redirected its focus
towards domestic operations. Provision impairments for its UK division
exceeding A$1.5 billion coupled with a write-down dragged NAB’s cash
earnings lower by 10 percent, resulting in a net profit fall of 1.1
percent.
Despite the underperformance, NAB still exhibits substantial dominance
in the domestic business sector. With the expected UK exit, a refocus
on Australia and New Zealand franchises and strong business credit
demand, the bank is expected to rebuild its balance sheet strength.
CBA and Westpac both recorded solid profit earnings as a result of
core business growth, with all key earning indicators consistent with
the broader industry outlook. Consumer and mortgage growth were the
main factors.
CBA reported a ‘profitable growth’ in the market via strong new
business activity, boosting first quarter earnings by nearly 10
percent. Despite a spate of financial planning legal controversies
throughout the year, CBA’s wealth management arm succeeded in
expanding assets under management by 3.5 percent in the first quarter,
providing sound support for the bank’s A$2.3 billion unaudited
quarterly earnings. |
Similarly,
Westpac’s growth was also buoyed by improved market share and lending.
In the second half of 2014, Westpac’s residential mortgage and
business lending scope increased by 1.3 and 1.4 times the average
respectively, outperforming its Big Four rivals.
The customer count for its wealth management and financial services
arm also grew by 6 percent, reflecting successful executions of the
bank’s customer centric strategies. Westpac announced a full year cash
profit of A$7.62 billion up to September 2014, representing an 8.0
percent increase.
The magnitude of the Big Four’s profit was significantly affected by a
broad fall in bad debt provisions as households continued to exploit
the low interest rate environment, paying down debt ahead of schedule.
The aggregate bad debt expense across the four banks fell by A$1.5
billion, making up 65 percent of total pre-tax profit growth.
Overall, the banks delivered an exceptional performance. An aggregated
return on equity result of 15.5 percent within the current economic
environment highlights the resilience of the industry and essential
contribution they make to the economy.
The impact of the Murray inquiry was a special point of interest
highlighted in this round of results. All four banks reported a level
of CET1 that’s above the threshold of Basel III while simultaneously
expanding lending activity by 7 percent. This allowed the banks to
create a superficial compliance to the upcoming regulation without
making sacrifices to their core operations.
Such outcomes steered the market’s focus away from the actual
direction of the report and generated a sense of complacency, as the
results were conceived during a period of historically low bad debts,
heightened levels of deposits and moderately stable economic
conditions.
Nonetheless, the current level of safe capital is deemed optimal for
financial stability without home lending sacrifices. Therefore should
the market accept the current position or demand a higher capital
buffer? |
