An analysis of major bank profits by professional services firm EY has found that bad and doubtful debts will rise as economic challenges begin to bite.
EY’s analysis of the major banks’ 2015 full-year results found that the big four reported combined cash earnings of $30 billion – an increase of 5.4 per cent from the same period last year.
According to EY’s analysis, despite reduced pressure on funding costs and increased competition, lower rates and regulatory capital requirements are constraining interest margins and slowing the growth of the major lenders.
EY’s Oceania banking and capital markets leader, Tim Dring, said that while the banks have maintained strong asset quality, this is not sustainable given economic cycles.
“We are already seeing pockets of pressure emerging, particularly in the resource-exposed states of Queensland and Western Australia, with higher levels of stressed retail loans and a slight uptick in mortgage arrears,” he said.
“The challenges of Australia’s economic transition, coupled with a likely cooling of property markets in Sydney and Melbourne, and the impact of China’s slowdown suggest bad and doubtful debts will rise from their current low levels.”
Mr Dring highlighted that Australian banks have a high exposure to the housing market compared with other countries.
“Regulators are understandably wary of the downside risks associated with this in the current environment and the banks are tightening lending standards in response to their increasing focus,” he said.
“This is likely to remain an area that will be closely monitored for some time, with APRA indicating that it is slowly ‘turning up the dial’ in its supervisory intensity.”
While the recent lifting of mortgage rates by the majors will provide the banks with additional margin to assist in mitigating constrained growth and increasing capital requirements, there are still a number of key challenges facing the sector, Mr Dring says.
“Financial markets volatility, increasing regulatory capital requirements, and margin compression from low interest rates and intense competition are all adding pressure. ROE is trending downwards and cost-to-income ratios of 40 per cent or less remain elusive,” he said.
“In order to continue to prosper in this new environment, banks will need to refocus on core businesses, redefine their structure and reshape their businesses through technology.”