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Australia’s major banks go from turnaround to transformation

Australia’s big four banks (the Majors) have seen a turnaround from last year, as the economy entered a new phase of its COVID-19 pandemic response. After the Majors played a significant role in supporting Australia’s recovery in 2020, they benefited from the country’s improved economic performance in 2021. But now they need to turn their attention to transformation as they look to their future performance.

KPMG’s Major Australian Banks Full Year Analysis Report 2021 shows the Majors reported a combined cash profit after tax from continuing operations of $26.8 billion in the last financial year, up 54.7% on FY20, but down 2.3% on FY19.

However, the underlying performance trajectory is less turbulent than the headline numbers suggest.

Asset writebacks in a recovering economy

Writebacks of collective provisions of $1.7 billion this year, compared to large collective impairment charges totalling $6.9 billion in 2020 in response to COVID-19, have had a big impact on the shape of the Majors’ profit results. Total operating income (on a cash basis) was up 0.1% on 2020 and down 1.5% on 2019. This almost flat revenue picture is more consistent with the single-digit percentage decline of cash profits between 2019 and 2021.

In 2021, the banks shifted their focus from economic support to recovery.

The most recent results show they will be moving forward with reinforced balance sheets. While the Majors have resumed more generous dividend payments, they continue to retain profits and proceeds from simplification divestments to further raise their CET1 ratio (Tier 1 capital) by 1.31% to an 'unquestionably strong' 12.7%. They have also managed to raise their capital levels while collectively buying back $13.5 billion worth of their own shares.

On the flip side, costs remain stubborn. Even though the Majors remain committed to their long-term cost efficiency targets, they have been unable to structurally reduce costs in 2021. Excluding notable items, total operating costs increased by 3.6% to $38.2 billion. This is due to several factors including regulatory compliance requirements, ongoing customer remediation and increased processing volumes that have resulted in strong FTE growth across all the Majors.

Hitting a transition point

Having stabilised themselves from the initial impacts of the pandemic, Australia’s banks now arrive at a new transition point. In 2022, they will need to start delivering on their transformation programmes and positioning for a future that will be very different to the past. 2021 saw growth across both housing (up 5.2% on 2020) and non-housing lending (up 1% on 2020). Much of this growth has been the result of strong increases in house prices and underlying economic recovery. It is unclear if these trends will continue, especially if interest rates are raised in the 2022 financial year.

To successfully transition to post-pandemic performance, the Majors will need to lower their operating costs while continuing to invest in growth. The transformation imperative includes a revenue challenge. The Majors are all looking at new ways to create value that will better serve their customer needs while opening up new revenue opportunities.

It will be a delicate balancing act, one that will require the banks to re-think and transform their operations while genuinely innovating around their business models.

See the longer report for more detail, here KPMG’s Major Australian Banks Full Year Analysis Report 2021.

Hessel Verbeek is Partner, Banking Strategy Lead and Maria Trinci is Partner, Financial Services at KPMG. This article is general information and does not consider the circumstances of any investor.

 

3 Comments
Anthony
November 26, 2021

I bank with and invest in both ANZ and Macquarie. As a customer I'm not overjoyed with either. As an investor I would only be concerned about their customer service if it had a material impact on their share price and/or dividends.

I expect it must be difficult for a regional bank to scale a brand that has been built on a high level of personalised customer service. It might be interesting to understand how sensitive Australian bank customers are to changes in service levels, particularly as interest rates rise. In the current climate of inflated house prices and rising interest rates I expect most highly leveraged borrowers would prioritise the cost of servicing their mortgage over the customer service they receive. It seems the majors are well positioned in anticipation of a rising interest rate environment. If the cost of servicing a loan becomes the most important consideration for borrowers, the regional banks may not fare quite as well.

david edwards
November 18, 2021

I do wish commentators would include mention of the smaller banks in their analyses...esp. Bendigo, which has 5-star customer service (and it's a Bank!) and similar healthy div yields to the Big Four. A Cinderella that gives better service AND sound financials to shareholders.

Allan
November 17, 2021

"[...] The Majors are all looking at new ways to create value that will better serve their customer needs while opening up new revenue opportunities. [...]" New ways to create value? If it ain't broke (with 'it' being the crafty Cohen Brown method of upselling which is exposed in Adele Ferguson's beaut book, "Banking Bad"), like myriad those Major Banks' customers taken to the cleaners, then why fix it? When a government robs Peter to pay Paul, it can always Bank on Paul coming to the Party.

 

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