Rising rates fail to boost major bank margins

The contentious rate hikes that characterised the mortgage market in FY17 have made little difference to the mortgage profitability of Australia’s largest lenders.

Professional services giant KPMG’s Major Australian Banks: Full Year Analysis Report 2016–17 found that the big banks have faced tougher conditions over the 2017 financial year as regulatory costs and rising capital levels begin to bite.

“The majors have continued to face margin pressure, with heightened competition, higher wholesale funding costs, holdings of liquid assets and the prevailing low interest rate environment not sufficiently offsetting mortgage repricing efforts,” KPMG said.

Earlier in the year, the majors lifted rates for new and existing borrowers on interest-only mortgages in an effort to meet APRA’s regulatory measures. Their decision to pull the price lever was met with heavy criticism. The CEOs of the big four banks were called to Canberra last month to explain their mortgage pricing, but the parliamentary inquiry was given little evidence that the rate hikes were a calculated move to increase profits.

According to KPMG, the major banks recorded an average net interest margin of 201 basis points (cash basis), down by 5 basis points compared to 2016. This is expected to continue with the introduction of the major bank levy to fully flow through in subsequent reporting periods.

Collectively, the majors’ net interest income growth was 1.7 per cent to $61.3 billion in the year, while non-interest income also increased by 3.8 per cent to $24.6 billion mainly due to improved market conditions and one-off asset disposals.

Housing credit recorded a full-year growth of 5.3 per cent, compared to growth in non-housing credit of 0.1 per cent.

KPMG Australia’s head of banking, Ian Pollari, said: “Against a backdrop of subdued economic growth, slowing demand for credit, continued margin pressure and high regulatory and capital costs, the majors have been adept at managing a number of headwinds to deliver a solid result for the full year.

“Stagnant wage growth and high levels of underemployment are keeping a lid on economic growth and, in turn, demand for credit, with growth moderating to mid-single digits.

“Consequently, the majors will focus their efforts on cost management, simplification and investing in digital capabilities, while ensuring [that] debt serviceability and disciplined pricing [are] maintained to preserve future earnings.”

The KPMG report found that the majors reported a cash profit after tax of $31.5 billion for the 2017 full year, up by 6.4 per cent compared to 2016.

“The result was achieved in spite of the challenging margin environment, rising capital levels, and ongoing regulatory, legal and compliance costs,” the group said.

The major banks’ aggregate charge for bad and doubtful debts decreased by $1.2 billion to $4.0 billion (statutory basis) for the full year (down by 22.5 per cent on 2016).

Andrew Yates, KPMG’s national managing partner for audit, assurance & risk consulting, said that the majors have demonstrated an ability to preserve credit quality in a challenging growth environment.

“As interest rates inevitably rise,” Mr Yates said, “they will need to balance their pursuit of future volume growth, with profitability and a strong focus on pricing discipline.”

[Related: Narev comes clean on CBA’s $500m rate hike]

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