LA Private

Analysis of big banks’ half-year results

Despite some slightly hysterical claims about the big banks being ‘casualties’, their half-year results confirm they are a long way from being wounded by the sluggish economy, high inflation, and tightening margins.

But they could be damaged by problem loans in the months ahead, with a warning on Tuesday that the impact of rising business bankruptcies and expectations of a rise in consumer debt problems.

That warning made the $5.5 billion in buybacks, plus higher dividends, look a little too generous ahead of a weaker second half.

Profits eased to a combined $15 billion (from $16.1 billion a year ago) for the Commonwealth (December 2023 half-year) and the NAB, Westpac, and ANZ for their half-years ending March 31.

Reports from KPMG and PwC on the half-year performance of the Big Four (and what it means for their immediate and medium-term futures) were generally supportive –

Net earnings totaled $15 billion, which was down 10.5% compared to the first half of 2023 and an average of 0.3% from $15.1 billion for the second half of 2023.

“Income is broadly flat, the pace of margin erosion has slowed, and operating expenses have reduced modestly compared to the second half of 2023,” KPMG said.

In fact, KPMG said in its analysis that it had sighted some ‘green shoots’ in the reports, such as a slowing in margin compression (it is continuing, but at a slower rate).

“Total revenue growth was subdued in the half, with the Majors (Big Four) reflecting a modest 0.5% increase in total operating income compared with the second half of 2023. This was driven by average growth in total assets of 1.7% and 3.0% over the last 6 and 12 months, respectively, with net interest income now comprising 85% of the Majors’ total revenue,” KPMG pointed out.

“Retail lending has continued to demonstrate margin compression due to competition and the deposit mix, with the Majors losing nearly 5% of market share since 2019. There has been a slowing in back-book pricing decline which may indicate a level of margin stabilization.”

KPMG said the big four are looking for new growth and higher return opportunities, with business lending a common focus area. In 1H24 growth rates for both business and household lending were almost identical.

“While the Majors saw a positive spike in their interest margins in 1H23 as a result of rate rises, NIMs over the past 12 months have declined, consistent with the trend of the last 10 years. This decline has been driven largely by competition for home lending volumes and rising deposit and wholesale funding costs.

“Positively, in 1H24 we are seeing a slowdown in the rate of margin compression as the Majors pull back from heavy competition, and deposit and wholesale funding pricing begins to stabilize in line with interest rates. This is evidenced by a relatively small decline in the average consumer NIM for the first half of FY24 as compared to during the second half of FY23,” KPMG pointed out.

But the outlook is clouded by the impact of high-interest rates and weak consumer demand.

KPMG said that business insolvencies are at their highest levels in over a decade based on challenging economic conditions and elevated interest rates.

“The credit concerns evident in business portfolios have had a limited but growing impact on retail portfolios to date. Consumer credit quality continues to benefit from low unemployment, robust house prices, and remaining savings buffers.

“This is likely to change over the remainder of 2024 with an expected increase in consumer arrears flowing from business challenges.”

And it was a similar story from PwC Australia’s survey, which described the reports from the four majors as “a strong (amongst records), steady result providing the flexibility for returns of capital.” (which we saw with $5.5 billion in buybacks from the quartet).

PwC pointed out that it was the second-highest half-year result since 2017…”however long-term trends appear to be resuming.”

“Earnings were up slightly for the half and down significantly on a year ago, with margin pressure on mortgages and deposits yet to relent and not quite balanced by growing balance sheets.

“Non-interest income rose for the second time in twelve months but remains a small component of income. Expenses rose but were offset by falling notables and credit expense, as the economy continued its ‘Goldilocks’ course.”

And like KPMG, PwC pointed out that “Long-term challenges for the industry remain unchanged.”

“In principle, banks have everything they need to do just that. They have got themselves in great shape: healthy returns, simpler and safer.

“It’s remarkable to observe the questions now being asked include whether they might in fact be too simple or even too safe.

“That’s because the slow, but significant, trends of the last 15 years combined with the expanding capabilities and challenges we see ahead may require transformation more fundamental, and faster, than anything the industry has experienced in a very long time. They are also emerging at what looks like an accelerating pace.”