Four separate analysis pieces from each of the “big four” accountancy and business consultancy firms — Deloitte, EY, KPMG and PwC — have highlighted how the 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.
The analyses from the big four firms show that headline cash earnings of Australia and New Zealand Banking Group (ANZ), the Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) and Westpac Banking Group (Westpac) dropped by 5.5 per cent year-on-year, from $31.2 billion to $29.5 billion in the full year 2018.
Likewise, lending grew at just 3.1 per cent in FY18, the lowest growth rate in a decade.
Several lenders, such as AMP Bank, have already recently noted that growth is being affected by increased flows to the non-bank sector.
Each of the accountancy firms noted challenging conditions that the big four banks had faced, and would continue to face in the near future, including the impact of ongoing regulatory reform, scrutiny from the ongoing financial services royal commission, conduct challenges, customer remediation and the upcoming open banking regime.
Further, the reports noted that competition from non-major banks and non-bank lenders was also having a marked impact on the big four banks’ market share and growth.
One of the accountancy firms said that “if non-banks continue to grow at this rate, regulators will need to keep a close eye on the implications for the system”.
Non-bank growth rate could catch the eye of the regulators
PwC’s 2018 Major Banks Analysis suggested that lending growth had been subdued “in part because system growth has slowed, and in part because the majors have lost share to smaller bank and non-bank players”.
“Some of these movements reflect the major banks’ response to a significant increase in focus on compliance obligations, especially for mortgages. They have tightened lending standards, are asking more detailed questions about purpose and financial circumstances, and are demanding more evidence. These measures have put a drag on overall home lending in Australia, and have likely continued to a shift away from the majors,” the report reads.
Speaking after the release of the report, PwC Australia’s banking and capital markets leader, Colin Heath, added: “The major banks’ share of credit is starting to decline, with non-banks in particular seeing a notable lift in lending, reaching 27 per cent on an annualised basis for the third quarter of this calendar year.
“While this data is too early to call a trend, if non-banks continue to grow at this rate, regulators will need to keep a close eye on the implications for the system.”
Analysis of the big four banks’ 2018 full-year results from EY also observed that the competitive landscape for Australian banks was undergoing “rapid change”.
Policy initiatives aimed at increasing innovation and competition are starting to “chip away” at the entrenched position of the major banks, EY said, echoing the sentiment that the evidence suggests that non-bank lending has been growing off the back of the major banks’ tighter lending standards and from macro-prudential constraints on investor and interest-only loans.
“These pressures are likely to increase further over the next year with the mandated introduction of open banking in July 2019 and a renewed focus on new policy initiatives to increase competition in the sector from both sides of the political aisle,” said EY Oceania banking and capital markets leader Tim Dring.
“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.
“The challenge will be to do all this while also working to restore community trust and better align customer, shareholder, regulator and government expectations.”
Further, EY noted that the major banks may launch a “renewed focus on re-platforming for some banks” as smaller, nimbler lenders have been able to introduce more technologically driven core technology platforms, and will continue to do so with the introduction of real-time payments, comprehensive credit reporting and open banking.
Likewise, KPMG’s Major Australian Banks Full Year Analysis Report 2017–18 suggested that the banks will need to balance spending on remediation, legal and regulatory costs with continued investment in digital and technology innovation in the face of growing threats from new players.
Hessel Verbeek, KPMG partner for banking strategy, said: “Not only have the various compliance and remediation costs translated into higher cost-to-income ratios, the majors’ investment spend in risk and compliance projects is also up strongly and in most cases investments on growth initiatives has decreased in a relative sense.
“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.
“Trade-offs will inevitably need to be made.”
Additionally, Paul Wiebusch, Deloitte’s senior banking partner and co-author of the company’s Flying into Turbulence – Australian Banking Sector 2018 analysis, outlined that banks will potentially face greater competition from 1 July 2019 with the introduction of open banking in Australia.
Mr Wiebusch warned: “Open banking enables customers to share their transaction data, which allows mutual and regional banks, and non-bank lenders, to use this information to enhance customer experience, product offerings, pricing and services.”
[Related: Bank reports $129m drop in loan book]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.