High chance that banking rules will change: EY

As Australian lenders brace for the Financial System Inquiry’s final report later this month, expectations are high that the rules of the game may change – making continued growth an even greater challenge.

Professional services firm EY’s analysis of the full year results of Australia’s big four banks shows a solid performance, with headline cash earnings of $28.6 billion – an increase of 5.7 per cent from the 2013 full year results.

“These results have been largely underpinned by credit growth in the housing and construction sectors, reductions in loan impairment charges and further recoveries from credit loss provisions,” the report said.

However, the key question for Australian lenders is where future levels of sustainable earnings growth will come from.

“The banks are experiencing low interest rates and subdued loan growth on the business and corporate side of the books,” the report said.

“Competition has also put increased pressure on bank margins, which have reduced by five basis points from the prior year,” it said.

EY’s Oceania Banking and Capital Markets leader, Tim Dring said the expansionary monetary policy adopted by the RBA has stimulated demand in the housing sector, which has seen home loans rise by 7.2 per cent from 2013.

“On the other hand, there are ongoing discussions around whether further macroprudential regulations are needed to curtail the impact of a possible housing bubble,” Mr Dring said.

“The major banks are also awaiting the findings of the Financial System Inquiry, due to be handed down later this month,” he said, adding that any recommendations, particularly around the dichotomy of competition and financial stability, could have an impact on the sector.

“In this environment, expectations are high that the rules of the game may change – making continued growth an even greater challenge.”

Faced with a dilemma when deciding how best to pursue future growth, some banks will challenge their operating models, choose to loosen underwriting standards, some will compete on price and some will do a mixture of both, Mr Dring said.

“Each of these strategies comes with significant risks and their ultimate benefits may not be realised for some time,” he said.

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