The major banks face mounting pressure from tightening margins, higher capital requirements and an inevitable rise in impairments from the current cyclical lows, according to a KPMG survey.
Released last week, KPMG's Major Australian Banks: Half-Year Results 2014, found the majors will need to intensify their efforts to enhance productivity and realise further efficiency gains, actively manage margins across their business portfolio and maintain disciplined lending practices.
The major banks’ net interest margins have continued to fall, declining by 20 basis points compared with the previous half-year period, driven by pressure on front book lending for mortgages plus corporate and institutional lending margins, the survey found.
“The margin result is a by-product of a low cash rate environment, increased lending competition, lower earnings on capital and holdings of liquid assets,” KPMG national head of banking Ian Pollari said.
“This was partially offset by easing deposit pricing and lower new issuance costs on wholesale funding,” Mr Pollari said.
One aspect of the results, which will be hard to maintain, is the continued reduction in loan impairment charges which have fallen to $1.8 billion, down by $149 million when compared with the 2013 second half-year, according to the survey.
However, the half-year result also indicated a rise in the level of stressed and overdue accounts, with 90 days-plus delinquencies increasing by 7 per cent over the previous period.
“While asset quality ratios show continued improvement for the majors, going forward they will need to remain vigilant as their credit risk management of 90 days-plus delinquencies starts to climb and, in particular, interest rates begin to rise,” KPMG Asia Pacific head of banking Andrew Dickinson said.
The majors recorded further improvements in their capital adequacy levels, with their Tier 1 capital ratios increasing by 28 basis points over the first half, above current minimum prudential requirements.
“Whilst capital is a relative strength of the major banks, they will be focused on ensuring efficient management of the transition to new requirements, such as the D-SIB surcharge and conglomerates standards,” Mr Dickinson said.
The majors’ cash profit after tax of $14.7 billion for the 2013/2014 half year was up 6 per cent from the 2013 second half year result ($13.9 billion), reflecting continued performance improvements.
Overall revenue growth was modest, with flat non-interest income evidently driven by mixed factors across wealth management and markets income at each of the majors.
Non-interest income on a statutory basis increased marginally by $26 million to $12 billion, a rise of 0.22 per cent over the first half.