Strong Half Year Results Belie Mounting Headwinds for Big Four
(16 May 2023 – Australia) While the Big Four Australian bank majors released impressive half year results, concern is mounting over growing headwinds in the form of rising competition, costs, inflation, interest rates and pressure on business confidence.
Australian banks are being forced to manage competing demands of investors, customers, regulators, and government in an “increasingly uncertain and volatile backdrop” according to EY.
While margins have surpassed levels not seen since 2019, KPMG indicated that they are under pressure from intense pricing competition coupled with a significant increase in interest expenses.
PwC identified four key themes that it predicted would play out in the medium term, including a squeeze on the core as a result of continued competition, inflation pressure on costs, and a more normal credit loss environment.
“Australia’s major banks are walking a tightrope as headwinds for the sector intensify. Intense competition in response to retail credit growth compression, coupled with rising funding costs, amplified by the recent dislocation in financial markets, will likely erode the benefits the banks have gained from the higher interest rate environment” commented EY Oceania Banking and Capital Markets Leader, Doug Nixon.
“In this reporting period, we see the majors have grown both the volume and profitability of their loan books. However, this is now being offset to a degree by the more than 400 per cent increase in interest expense compared with 12 months ago, driven by the rising cost of deposits and wholesale funding” stated KPMG Australia’s Head of Banking and Capital Markets, Steve Jackson.
“Overall, Australia’s major banks remain in terrific balance sheet and business model shape, with regulatory metrics well in the top quartile of international banks and businesses simple and focused. While this has led to a narrower base of earnings, it has also put our banks in a far stronger position to absorb volatility and explore new opportunities. The banks are likely to be extremely discerning of the risk/reward trade-off in these decisions” stated PwC Australia Banking and Capital Markets Leader, Sam Garland.
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