Improved Results for the Major Banks

Australia’s big four banks (the Majors) delivered a much improved performance in their latest financial results as banks are now benefiting from Australia’s economic recovery in 2021 and going into 2022. 

According to KPMG’s Major Australian Banks Full Year Analysis 2021 Report published in November, the Majors posted a combined cash profit after tax from continuing operations of $26.8 billion in the latest financial year. This was +54.7% on the previous financial year, though down 2.3% on FY19.  The Majors’ net interest margin (NIM) declined 3bps over the year driven by low interest rates and high competition.  This is also despite cheap funding from the RBA’s Term Funding Facility which closed to drawdowns on 30 June 2021.

The Majors’ latest profit results was boosted by the release of collective provisions of $1.7 billion compared with impairment charges amounting to $6.9 billion in 2020 in response to the COVID-19 pandemic.  The release in impairment provisions this year reflects improving economic conditions in Australia and lower than expected losses through the pandemic.  However, total impairment provisions of $21.5 billion still remain high compared with pre-COVID levels which will continue to serve as a buffer against potential future risks.

The Majors’ cost-to-income ratio decreased from an average of 53.3% in FY20 to 52.1%.  Operating costs (excluding notable items) increased by 3.6% to $38.2 billion due to regulatory compliance requirements and ongoing customer remediation.

The Majors also continued to strengthen their capital levels, with the average Common Equity Tier 1 (CET1) ratio rising 131 bps to an “unquestionably strong” 12.7%.  The Majors further improved capital buffers while dividend payout ratios increased from 52.3% in FY20 to 70.0% in FY21 driven by banks’ robust financial results and confidence in Australia’s economic recovery. 

Macro-Prudential Framework

At the end of November, the banking regulator Australian Prudential Regulation Authority (APRA) finalised its new bank capital requirements framework.  APRA said its new framework, which is effective from January 2023, would not force banks to raise more capital and it would just tweak the risk asset weightings.  Simplistically, the risk weightings on the riskiest mortgages (interest-only and investor loans) will be increased, while risk weightings on certain types of small business loans will fall modestly.

This new capital framework had been repeatedly flagged by APRA in the market, and banks have therefore already moved to adjust their interest rates, particularly for interest-only, investor loans, and borrowers with high loan to value ratios.  APRA hopes the new capital requirements framework will also incentivise banks to lend prudently, by requiring more capital to be held for riskier loans with a higher probability of loss. This also follows APRA’s new rules announced in October which requires lenders to increase the serviceability buffer for mortgages to an interest rate rise of 3.00% from the previous 2.50% as part of macro-prudential regulation to limit the increase in mortgage borrowing. 

Overall the recent financial performance of the Majors combined with APRA’s revised rules and new capital framework is seen by Amicus as a positive for each bank’s longer-term credit risk and asset quality profile.  However underlying pressures remain including low interest rates (meaning suppressed NIMs), strong mortgage competition, emergence of neo-banks and other financiers with improved technology and business models and potential disruption of economic activity due to new COVID variants.

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