Remediation And Restructuring Hit Bank Bottom Lines

Australia’s four major banks have released results showing the first signs of economic, competitive and conduct challenges materialising into financial pressures, with headline cash earnings dropping 2.8 percent half-on-half to $15.24 billion in the first six months of FY18.

PwC’s 2018 Half Year Major Banks Analysis found that despite margins holding up as well as historically-low bad debts and control of the underlying cost base of Australia’s four major banks, performance has been hit with slowing credit growth, a slight loss of aggregate market share, and more than $1.4 billion in restructuring and remediation costs.

PwC Australia’s Banking and Capital Markets Leader Colin Heath says the half-year results show the early signs of an ever more challenging outlook, including the fallout from the Royal Commission and reviews from Australian Prudential Regulation Authority, the Australian Competition and Consumer Commission and Productivity Commission.

“The economic, competitive and conduct challenges we’ve been talking about for some time are starting to play out and this is the first time we’ve seen it start to impact the bottom line,” Mr Heath says.

Interest margins increased year-on-year as the final benefits of mortgage repricing early last year flowed through, despite the offset of the federal government’s Bank Levy. That levy cost the banks an estimated $730 million (three banks reported a collective $543 million) in the first half of the year.


Across the four major banks, the expense-to-income ratio for the last six months was up 227 basis points half-on-half, and 233 basis points against the first half of 2017, to 45.32 per cent, entirely driven by remediation and restructuring costs.

Mr Heath says Australian banks have been working hard on their cost base for some time and underlying costs appear tightly controlled despite increased investment in change and new technology.

CET1 and Return on Equity

The analysis found capital ratios have increased 24 basis points half-on-half to 10.56 percent, as banks move towards complying with the APRA’s decision to increase the minimum tier 1 capital (CET1) requirement to 10.5 percent by 2020.

As a result, when combined with a softness in earnings, Return on Equity has fallen 50 basis points half-on-half, to 13.05 percent – the lowest level since the global financial crisis.

“Compared to five years ago when it was around 17 percent, that’s a significant fall,” Mr Heath says.

“It is hard to see growth in equity returns over the short term. There are obviously a lot of challenges, and they will keep returns under pressure.”

Credit growth and bad debt

The analysis found bad debt expense remained at historically low levels at $1.8 billion with little sign of household stress impacting mortgage repayments.

Housing credit growth remains critical to overall credit growth, and in the current environment lending decisions are being increasingly scrutinised. Mr Heath warns that credit growth is slowing and this could impact bank financial performance going forward.

“We’ve  heard from each of the banks that there are going to be challenges around credit growth in the short term and we are starting to see credit growth slowing in recent data,” he says.

Mr Heath says that while moves to tighten lending controls are yet to fully flow through to the results, the clear message for banks at the moment- which has been out there for the last six to 12 months is that more scrutiny on lending is needed and it will mean that some lending decisions that were made in the past may not be possible in the future.

Housing credit growth is at around 6.1 per cent, for the last 12 months, which has tapered over the last six months as a result of regulator pressure on interest-only and investor lending. This looks likely to continue and may even accelerate going forward. There are signs that major banks are grappling with their market share, which has marginally contracted in aggregate.


Mr Heath says the results reported in the last half reflect the first signs that the ‘non-financial’ risks we have been discussing for a few years are manifesting in the bank’s bottom lines.

“Post the de-regulation of the banking system in the 80s, we had a credit crisis in Australia in the 90s which informed a lot of what the industry does on credit risk today. In the 2000s we had the global financial crisis which again, informed a lot of what we do on market and liquidity risks. In the same way, what we are experiencing right now looks absolutely set to provide the roadmap on conduct and non-financial risk for the years ahead,” Mr Heath says.

Mr Heath says the coming year will continue to be challenging for Australia’s four major banks.

“It is going to be particularly important to see how the banks, over the next six months, deal with underlying costs and margins. If credit growth does slow, banks are going to have to make good progress on the cost profile and think hard about pricing. Competition in the domestic market is pretty fierce and the findings from the reviews on competition in the sector may make this harder.”

Read the full report: Major Banks Analysis: May Half Year 2018