The regulatory uncertainty from the Financial System Inquiry, likely increased impairment charges in the future and structural and technological changes are putting pressure on the Australian banking industry.
According to a new report by KPMG, Major Australian Banks: Full Year Results 2014, the majors reported a record cash profit after tax of $28.6 billion for the 2014 full year, up 5.7 percent on 2013, aided by a buoyant housing market, historically low impairments and improved funding conditions.
Andrew Dickinson, KPMG’s Asia Pacific head of banking, said given the high level of household indebtedness, the majors will need to ensure that loans originated in the current environment can still be serviced by borrowers in less favourable circumstances.
“For instance, at higher interest rates or during a period of weaker economic conditions,” he said, adding that pressures continue to mount on the majors’ ability to generate higher returns, reflecting the impact of significantly increased regulatory capital requirements.
“In the medium term, we expect the majors to intensify efforts to improve productivity levels and realise efficiency gains whilst actively managing margins across all portfolios, particularly in the face of building amortization charges,” Mr Dickinson said.
The KPMG report found that sustained levels of strong bank profitability have underpinned a further strengthening in the majors’ capital position, with their aggregate Common Equity Tier 1 (CET1) capital ratio rising by 38 basis points over 2014 to 8.93 per cent of risk-weighted assets (RWAs), largely reflecting the accumulation of retained earnings.
“With the increasing regulatory burden, this is critical to the majors’ ability to balance capital adequacy with the efficient and flexible use of their capital to satisfy investor expectations for higher returns on equity,” KPMG’s national head of banking Ian Pollari said.
“Notwithstanding the positive result achieved by the majors, tensions are rising as they seek to balance the competing demands of various stakeholders – calls for higher levels of capital, supporting economic growth (through lending), achieving higher returns and confronting new sources of competition and digital disruption,” he said.