Capital requirements hit bank profits

The major banks have recorded an aggregate 3 per cent fall in first-half cash profits as the new capital requirements and a tough operating environment take their toll, according to KPMG.

The professional services giant has released its Major Australian Banks Half Year Analysis Report 2015-16, which found that the aggregate cash profit after tax for the big four banks was $14.8 billion for the 2015-16 half year.

Ian Pollari, national head of banking at KPMG, said difficult economic and market conditions, coupled with the continued upward trajectory of regulatory capital “are now starting to bite for the majors, underpinning a softer half-year result”.

“The benign credit environment of recent years has begun to deteriorate and could restrain future earnings. However, credit problems are mostly restricted to a handful of institutional credits,” he said.

“Given credit’s cyclical nature, it is inevitable that loan impairments would eventually start to rise. What has been a positive driver of results for the industry over recent years is now becoming a slight headwind.”

Meanwhile, KPMG said, “challenging” market conditions in the mining and resources sector have seen the major banks’ aggregate charge for bad and doubtful debts increase by $834 million to $2.5 billion – up 49 per cent on the prior corresponding period.

The banks have also continued to strengthen their capital positions, with the aggregate Common Equity Tier 1 capital ratio rising by 43 basis points over the first half of 2015-16 to 10.1 per cent of risk-weighted assets.

KPMG partner of financial services Andrew Dickinson said banking industry returns are now “bearing the brunt” of increasing regulatory capital requirements.

“This saw the majors’ returns on equity falling by 153 basis points to an average ROE of 13.8 per cent for the half year,” he said.

“This compares to 10 years ago when the majors had an average ROE in excess of 20 per cent, reflecting the impact of increasing levels of capital over an extended period.

“It will also inform their strategic decision-making around what businesses they wish to be in over the medium-to-longer term, exiting low-growth, low-return and capital-intensive products and markets.”

Looking ahead, Mr Pollari said an operating environment that “foresees a combination of further increasing capital levels, rising loan losses, weaker demand for credit and continued downward pressure on returns” will force the majors to strengthen their focus on productivity and capital efficiency measures.

[Related: Macquarie well positioned for uncertain future, says Moody’s]

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