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Big four bank earnings solid but costs a concern

The big four banks have all now reported, with the group lifting its combined earnings 7% to a total of $28.5 billion for 2021-22.

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While the average net interest margin (NIM) continued to dip for the full year, NAB, ANZ and Westpac all saw second half improvements with the promise of more to come. CBA, which releases its first quarter update next week, only reported to June 30 – too close to the start of the Reserve Bank’s interest rate rises, which have so far totalled 2.75% and come mostly after July 1.

The average NIM for the big four for their full years fell 11 points to 1.67% but the fall was softened by rising rates in the six months to September.

In analysis of the Big Four’s results, accounting services group EY said “rapid increases in the cash rate since May supported loan revenues and margins in the second half for most of the banks, as they actively managed mortgage and deposit pricing.”

Asset quality remained strong, with loan losses at low levels as well as a net write back from previous loan set asides of $130 million (meaning the releases from their provisions exceeded smaller impairment set asides in the year). That was down $680 million from 2020-21.

Return on equity (ROE) continued to trend upwards, reflecting earnings improvements. ROE was up 65 points at 10.6%.

And while the banks and their executive teams all talked the talk about inflation, cost pressures, high cost of living, the financial stresses on customers, rising interest rates, falling house prices, the impact of global change, floods and La Nina and the chances of a recession and global events, none went full bore and set aside huge amounts to cover a looming crisis, as they all did in the early days of the pandemic in 2020.

Accounting rules require banks to set aside more money if they see financial pressures for themselves and their customers rising in the next period (half or full year) and it is striking that no bank – major or smaller – has done that this year.

Given all the doom and gloom talk you’d be entitled to ask whether that is prudent, or an accurate reading of the outlook for the economy, growth and their profits over the next six to 12 months.

EY did however point out in its commentary that the outlook is not pristine, economically, financially or systemically.

“…significant and interconnected global threats are challenging economies around the world and the list of countries that are slowing or likely to recess is growing.

“Rising and broadening inflation is prompting monetary policy tightening in many economies at the same time as tight energy supplies disrupt normal production and consumption. The Australian economy is not immune.

“As well as being impacted by slower growth across its trade partners’ economies, inflation is surprising on the upside and new supply side challenges are emerging, including floods, building on the factors already impacting the economy’s potential.

“Against this uncertain economic backdrop, the banks have reviewed potential future loan losses and revised forward-looking adjustments for ongoing risks, including inflationary pressures, rising interest rates, supply chain disruptions and labour market challenges.

“Sustainability also remains firmly on the banks’ agenda, as governments, regulators and investors look to banks to drive decarbonisation and wider sustainability initiatives. At the same time, the banks must manage the financial and operational risks associated with climate change.”

Costs remain a big concern – the NAB warned of higher costs in its third quarter update in August, which included provisions of $60 million to $100 million to address the regulatory concerns about its anti-money laundering regime.

It indicated that it expects cost growth in the 2022 financial year to be 3% to 4%, up from its May forecast of 2% to 3 %.

Westpac also warned of rising costs in its final result on Monday and lifted its 2024 cost cut target $8.6 billion from the original $8 billion in a quite acknowledgement that its cost pressures are rising and it will have to do more to hold the confidence of investors.

EY also pointed out that the bank will face a slowing in demand for the major profit earner – home loans as credit growth slows (the home loan approvals figures from the Australian Bureau of Statistics and the Reserve Bank’s housing credit data confirm the slow down).

“Demand for both residential mortgage and business credit remains elevated, but residential mortgage growth is slowing,” EY pointed out.

“Total housing credit grew 7.3% over the 12 months to September but has been slipping from its recent high of 7.9% earlier in the year as both owner occupier and investor lending slows.

“Business credit has continued to grow strongly amid robust and resilient business conditions, increasing by 14.7% over the 12 months to September. However, business confidence is softening.

“Housing credit availability is expected to be more constrained over FY23 on the back of anticipated further rate increases and tightened loan serviceability hurdles for borrowers.

“This will place further downward pressure on national house prices, which have fallen 6.5% across capital cities following a 25.5% rise through the upswing.

“The housing slowdown is a major concern, as residential mortgages account for the majority of lending revenue. Home loans are therefore a key battleground,” EY forecast.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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