Major Australian Banks - KPMG | US · PDF file2 Major Australian Banks: ... banks recorded an average net interest margin of 204 basis points, up 1 basis point on 1H15 and 2 basis

Major Australian Banks Half Year 2016 Results Analysis

Tougher conditions and new capital requirements start to bite

May 2016

kpmg.com/au/majorbanks

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1 Major Australian Banks: Half Year 2016 Results Analysis

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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Behind the numbers Cash profit after tax

ANZ share price down 28.3%

ANZ

• Cash profit after tax decreased 24.4% to $2.8bn

• Net interest margin declined 3 bps to 2.01%

• Reported cost to income ratio of 53.1%, an increase of 800bps

• Return on average equity of 9.7%, down 500bps

• Credit impairment charges increased by $408m to $918m

CBA share price up 1.7%

CBA • Cash profit after tax increased 3.9%

to $4.8bn • Net interest margin fell 5bps to

2.06% • Return on equity of 17.2%, down

140bps • Credit impairment charges increased

by $124m to $564m • Cost to income ratio flat at 42.2% • CET1 ratio up 110bps to 10.2%

NAB share price down 20.1%

NAB • Cash profit after tax increased 6.5%

to $3.3bn • Statutory loss after tax reported

reflecting the demerger of CYBG • Return on equity of 14.1%, down

20bps • Cost to income ratio of 41.6%, up

60bps • CET1 ratio down 55bps to 9.7%

WBC share price down 7.7%

WBC • Cash profit after tax increased 3.3%

to $3.9bn • Net interest margin increased 9 bps

to 2.14% • Return on equity of 14.2%, down

172bps • Credit impairment charges increased

by $326m to $667m • Cost to income ratio improved 85bps

to 41.6% • CET1 ratio up 100bps to 10.5%





Contents

Contents 3

At a glance 4

Executive summary 5

Net Interest Income 9

Asset Quality 13

Non-interest income 17

Capital 19

Costs 20

Return on Equity 23

Acknowledgements 26

Notes 27




At a glance

ANZ CBA1 NAB WBC RANKING 1H16 PCP2 1H16 PCP2 1H16 PCP2 1H16 PCP2 Ranking By profit before tax 4 4 1 1 3 3 2 2 By total assets 2 2 1 3 3 1 4 4 By total equity 3 1 1 4 4 2 2 3 By market capitalisation 4 3 1 1 3 4 2 2 By CET 1 capital ratio 3 2 2 4 4 1 1 3 Financial Performance – P/L Profit before tax ($ million) – statutory basis 3,882 5,143 6,389 6,320 4,613 5,203 5,238 5,246 Profit after tax ($ million) – statutory basis3 2,738 3,506 4,618 4,535 (1,742) 3,440 3,701 3,609 Cash profit after tax ($ million) 2,782 3,676 4,804 4,623 3,310 3,107 3,904 3,778 Performance Measures – P/L Net interest margin – cash basis (basis points) 201 204 206 211 193 192 214 205

Cost to income ratio – cash basis (%) 53.1 45.1 42.2 42.2 41.6 41.0 41.6 42.5 Basic earnings per share – statutory basis (cents) 94.8 128.0 273.6 277.5 125.9 147.2 112.3 115.5

Basic earnings per share – cash basis (cents) 95.9 133.6 284.4 282.5 125.7 127.8 118.2 120.7

Return on equity (%) – cash basis 9.7 14.7 17.2 18.6 14.1 15.8 14.2 15.8 Credit Quality Measures Impairment charge ($ million) - cash basis – P/L 918 510 564 440 375 399 667 341

Impaired loans to loans and advances to customers (%) – B/S 0.51 0.47 0.41 0.44 0.41 0.28 0.39 0.30

Collective provision to credit RWA (%)4 – B/S 0.86 0.85 0.84 0.87 0.98 0.99 0.87 0.86

Financial Position – B/S Total assets ($ million) 895,278 889,900 903,075 873,446 868,730 955,052 831,760 812,156 Total equity ($ million) 56,464 57,353 59,847 52,993 50,082 55,513 57,981 53,915 Capital Measures – B/S Capital Adequacy Ratios (%)5 - Total 13.7 13.3 14.1 12.7 13.3 14.2 14.0 13.3 - Tier 1 11.6 11.3 12.2 11.2 11.8 12.4 12.1 11.4 - Common Equity Tier 1 9.8 9.6 10.2 9.1 9.7 10.2 10.5 9.5 Market capitalisation ($ billion)6 68.4 78.6 145.7 137.4 69.4 74.1 101.2 94.0

1 CBA reported as at 31 December 2015. 2 Prior comparable period (PCP) data comprises of 1H15 for profit and loss (P/L) metrics and 2H15 for balance sheet (B/S) metrics. 3 Profit after tax attributable to the owners of the bank (on a statutory basis). Statutory loss of $1,742 million for NAB reflects discontinued operations. 4 Included in the NAB collective provision to credit Risk Weighted Asset percentage is a collective provision relating to loans at fair value. This collective provision is

included within the carrying value of other financial assets at fair value. 5 As disclosed in the banks results announcements. 6 Martket capitalisation sourced from statutory accounts or ASX.




Executive summary

The first half year 2016 results of the Australian major banks (the majors) suggest that the record earnings growth seen in recent years is slowing, reflecting the impact of a tougher economic environment and regulatory capital requirements. Margin pressures continued, although the majors have managed to preserve margins through asset re-pricing and improved spreads on customer deposits. As the transitioning economic environment continues to take hold, the majors will heighten their focus on productivity, capital efficiency and digital enablement.

Slowing profit growth

The majors reported a cash profit after tax of $14.8 billion for the 2016 half year, down 3 percent on 1H15. The softer growth in the cash earnings result is due to increasing loan impairment expense, higher technology related charges, and one-off impairment and restructuring costs against flatter revenue and margin growth. The impact of these higher operating costs are evident in the decline in statutory profit of $5.8 billion on 1H15 to $9.3 billion7. The result has also highlighted the continued compression of Return on Equity (ROE), down from 15.3 percent to 13.8 percent from the previous corresponding period. This downward pressure on industry returns is likely to continue, given the challenging economic and market outlook faced by the majors coupled with the upward trajectory of regulatory capital levels in line with new regulatory requirements.

Key features of the result (combined) include:

• Increasing loan impairment charges, up across the majors by $834 million to $ 2.5 billion on 1H15;

• Flat net interest margin growth (cash basis), up 1 basis point to 204 basis points on the 1H15 low of 203 basis points;

• Non-interest income growth of 3 percent to $12.1 billion impacted by one-off impairment and divestment of non-core businesses, combined with weaker wealth management and markets income;

• The continued upward trend in the average cost to income ratio, increasing 194 basis points to 44.6 percent largely driven by ongoing regulatory and compliance costs and higher technology related expenses, including amortisation charges as the majors

7 NAB has reported a statutory net loss of $1.74 billion reflecting the demerger of CYBG. The loss on the demerger, the operating result of CYBG and provisions for conduct costs with CYBG have been reported by NAB as part of discontinued operations. This represents a decrease of $5.2 billion against 1H15 statutory net profit. Excluding the impact of discontinued operations, a net profit after tax of $3.3 billion was reported, an increase of $76 million (2.4 percent). Cash earnings (discussed within this analysis) have been restated by NAB to exclude discontinued operations.

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




continue to invest in their systems and platforms to improve the customer experience and increase operational efficiencies; and

• Increased capital holdings across the board, compressing yields and ROE.

Rising loan impairment charges

The major banks’ aggregate charge for bad and doubtful debts increased from $1.7 billion (49%) to $2.5 billion in the first half. This rise has been reported by the majors as the level of loan impairment charges normalises to historical long-term averages and signals the end to the benign credit environment of recent years. While this downturn could restrain future earnings, the half year result points to credit problems being isolated to a small number of institutional credits and exposure to the mining and resources sector. Given credit’s cyclical nature, it is inevitable that loan impairments would eventually start to rise. What has been positive driver of results for the industry over recent years, is becoming a slight headwind now.

Continued discipline on pricing, debt serviceability and loan to value ratios will be important to ensure the major banks’ credit quality is maintained, particularly if unemployment quickly rises and/or the housing market sees a more abrupt correction in the future.

Profit before tax and provisions

Constant net interest margin pressure

Margins have remained relatively flat over the period. The major banks recorded an average net interest margin of 204 basis points, up 1 basis point on 1H15 and 2 basis point compared to 2H15. This result reflects the continued competitive pressures on front- book residential owner occupier pricing and in the Institutional and New Zealand markets, combined with a marginal increase in wholesale




funding costs. However, the downward pressure was offset by repricing of back-book mortgage portfolios, and increased spreads on customer deposits.

Average Net Interest Margin

The margin performance will be difficult to maintain restricted by the prevailing low interest rate environment, and holding of higher holdings of liquid assets under the new regulatory liquidity requirements. In addition, with the average cost of long-term wholesale funding costs likely to pick up and deposit pricing unlikely to improve further in the short-to-medium term.

Moderating balance sheet momentum, with housing credit growth of 3.4 percent and non-housing credit continuing to slowly improve, rising 0.1 percent, enabled the majors to satisfy a significant proportion of their funding requirements from customer deposits. Deposits grew modestly, rising by 0.1 percent

Capital and liquidity

New capital and liquidity requirements implemented by APRA over recent years is leading the majors to restructure their balance sheet and increase the resilience to future economic or market shocks.

Against this backdrop, the majors’ capital position continues to increase, with their aggregate Common Equity Tier 1 (CET1) capital ratio rising by 43 basis points over the first half to 10.1 percent of risk-weighted assets (RWAs), primarily reflecting the impact of increased regulatory capital requirements. They are maintaining healthy buffers against specific Basel III ratios, such as for the Liquidity Coverage Ratio an average of 127 percent versus the 100 percent minimum.

Operating cost remain high

The average cost-to-income ratio increased across the majors to an average of 44.6 percent8 for the 2016 half-year (increasing from 42.7 at 1H15). The relatively faster growth of operating expenses compared to revenues is attributed to the majors continuing to invest in meeting new and ongoing regulatory compliance obligations,

8 Adjusted for specified items reported by ANZ, cost to income declined 9 basis points to 42.6 percent




divestment of non-core business, streamlining and automating processes and enhancing digital capabilities. While the majors have reported progress with respect to these initiatives, these efficiencies have been offset by one-offs in the results by restructuring expenses and amortisation impacting the result.

Downward pressure on Return on Equity

Overall, the majors’ reported an average ROE (cash basis) of 13.8 percent in 1H16, down 153 basis points compared with 1H15 (15.3 basis points). The majors combined have increased their equity base by $21.1 billion since 1H15 following recent capital raisings directly impacting ROE. The pressure from holding additional regulatory capital and liquidity in line with new regulatory requirements coming through the pipeline in Basel 4, the Net Stable Funding Ratio and Leverage Ratio, combined with slowing financial performance, is making it increasingly difficult for the majors to increase their current level of ROE and high dividend payout ratios.

Outlook

In KPMG’s FY2015 full year analysis of the majors, we predicted that the 2015-16 year marked an inflexion point for the industry and that the outlook over the next couple of years to be far more challenging driven by a coalescence of factors (weaker demand for credit, rising loan losses, increased capital and liquidity, margin pressures, etc.). This is evident in the 1H16 result.

The Australian economy is going through a period of transition, with underlying consumer and business confidence remaining fragile. We expect a subdued economic environment to continue, with sustained low interest rates (lowered further this week by the Reserve Bank of Australia), weak demands for loans (and hence, slowing lending growth) and deteriorating credit quality.

These pressures, coupled with increased regulatory capital and liquidity requirements, will constrain their ability to continue to generate the high levels of return reported over the past five years. As a consequence, this will require the major banks to re-visit their business models, assessing the medium-to-long term viability of their various business lines and current geographic footprints (and exiting low growth, low return and capital intensive businesses and markets). In addition, the majors will need to heighten their focus on further improvements to their operational efficiency and productivity.

Finally, they will continue to invest in enhancing their customer relationships and engagement. Customer behaviour and expectations are dynamic and we expect this will continue to influence the digital/mobile revolution and how the major’s respond. Whilst fintech companies, start-ups and multi-national technology companies entering financial services in a more meaningful way remains a threat, it also presents opportunities for the major banks to enhance their technology capabilities, develop new commercial propositions, improve their agility and the customer experience. It will also present opportunities for the majors to explore adjacencies and new business models in the future.




Net Interest Income

Improved net interest income across the majors reflected an increase in earnings from higher average interest earning assets, primarily driven by elevated activity in the residential property market and business lending. However, average net interest margin remains flat at 2.04 percent reflecting continued competition on the lending side, increased costs of funding and lower yields on liquid assets.

The majors have been able to preserve their margins primarily through motgage re-pricing, offset by higher wholesale funding costs, holdings of liquid assets and the prevailing low interest rate environment

Cash basis 1H16 1H15 1H15

2H15 2H15

Mvmt Mvmt NET INTEREST INCOME

ANZ 7,568 7,138 6% 7,478 1%

CBA 8,364 7,875 6% 7,890 6%

WBC 7,653 6,934 10% 7,305 5%

NAB 6,600 6,210 6% 6,288 5%

Aggregate 30,185 28,157 7% 28,961 4%

NET INTEREST INCOME MARGIN

ANZ 201 204 -3bps 204 -3bps

CBA 206 211 -5bps 206 -

WBC 214 205 9bps 211 3bps

NAB 193 192 1bp 188 5bps

Aggregate 204 203 1bp 202 2bps

Interest margins




Net Interest Margin

Across the majors, active efforts have been made in addressing the continued contraction in net interest margins by repricing back-books and retail deposit portfolios, aided by the general easing in competition for retail deposits across the industry. However, net interest margins continued to be negatively impacted by increased wholesale funding costs and further competition in front-book asset pricing across Household, Institutional and New Zealand lending segments, as well as increased regulatory requirements leading to greater holdings of liquid assets, placing further pressure on net interest margins across the majors.

The average net interest margin across the majors has remained relatively stable at 204 basis points in comparison to the FY2015 full year result. However, as illustrated in the table (on the previous page), the underlying result for each major bank is mixed.

Credit Growth

Across the majors, average interest earning loans continues to grow steadily, increasing by 2.8 percent from 2H15 to $2,338 billion. This balance sheet growth was driven by continued momentum in the residential property market and moderate demand for credit, resulting in housing credit growth of 3.4 percent to $1,484 billion during 1H16.

Household lending is the core to the majors’ domestic franchises. As illustrated on the following page, household lending within the financial system has grown steadily during the period, however, competition within household lending between the majors and second tier banks has accelerated since the first half of 2015. Combined with the impact of consumer refinancing in reaction to repricing measures undertaken by the banks there has been a decline in market share amongst the majors by 114 basis points to 82.9 percent, an acceleration from the 44 basis point decline from the first half of 2014 to the first half of 2015.




Loans to Households and Marketshare of Household Loans %




Funding Mix

The majors have held margins relatively flat over the period, with their funding mix having a positive influence on the result. 1H16 saw customer deposit repricing across the majors and easing in competition from second tier banks which provided an uplift in margin. This was reflected by an increase in the deposit to loan book funding ratios by 92 basis points to 73.9 percent in 1H16.

This was marginally offset by an increase in wholesale funding costs. We note the majors have indicated that wholesale funding costs are expected to increase prospectively as a consequence of widening margins on securitisation pricing observed in the 2016 calendar year.

Customer deposits proportionate to total gross loans




Asset Quality

The Australian economy continues to undergo a structural transition from the end of the resources boom, with underlying consumer and business confidence remaining fragile and volatility being experienced in commodity prices. Despite a low interest rate environment and further easing announced by the Reserve Bank of Australia, the majors have reported a deterioration in asset quality driving the increase in total loan impairment charges by 49.3 percent to $2.5 billion.

The increases in impairment charges reported in the first half of 2016 have been largely restricted to the institutional banking segments of the majors as a result of one-off institutional losses. This was highlighted in the ANZ results, where it was reported that pockets of weakness associated with the resources sector and related industries played a large role in the $918 million provision charge (32 basis points loss rate) in 1H16.

Losses reported in residential portfolios have been limited in comparison. Consistent with institutional portfolios, distressed loans have been largely contained to regional locations aligning to the reported deterioration of assets linked to the mining and resources sector (and related sectors).

Total collective provisions increased across the majors as a result of higher arrears in home loans and personal loans, combined with the macroeconomic impact from the mining downturn. This further supports the view that the bottom of the credit cycle has been reached and we are now seeing more normalised levels of impairment charges. Combined collective impairment charges across the majors increased on 1H15 by 4 percent to $669 million.

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




Loan Impairment Charge




90+ day delinquencies

90+ day delinquencies increased 6.2 percent in 1H16 to $9.3 billion. ANZ, NAB and WBC both reported an increase in 90 days delinquencies while CBA reported an improvement of 12 percent. The result is a continuation of the fluctuation we have observed in delinquency rates over the past few years driven by seasonal variances, as well as the subdued economic environment. Whilst overall impaired loans are at historic lows, delinquency rates are rising consistent with the normalisation of loan impairment charges to longer-term historical averages. The following has been reported for the period:

• Delinquencies attributable to retail mortgages and personal loans increased due to portfolio growth across all operating regions and portfolio deterioration mainly in Western Australia and Queensland.

• A slight decrease in delinquencies attributable to small and medium enterprises and construction sectors.

Accruing Loans Past 90 Days




Challenging customer behaviour and expectations are dynamic and we expect this will continue to influence the digital/mobile revolution and how the majors respond




Non-interest income

The majors reported a combined decline in non-interest income of 3 percent to $12.1 billion. One-off impairment and divestment related items headlined the result, combined with softening wealth management and weaker markets income.

CBA posted an increase in non-interest income, up 5.3 percent ($204 million) off the back of a strong funds management performance and higher premium income in insurance, offsetting declines in trading income.

ANZ and WBC both reported one-off items, including impairment losses and the divestment of businesses as impacting the result. ANZ posted a decrease in non-interest income, down 10.1 percent ($309 million), primarily due to a $260 million impairment on overseas minority investments in addition to weaker markets performance, partially offset by favourable foreign exchange movements, and proceeds from one-off items, including the gain on the divestment of Esanda ($66 million).

WBC recorded a reduction in non-interest income of 3.9 percent ($120 million) largely driven by income foregone on the partial sale and deconsolidation of BT Investment Management ($191 million) and lower transaction fee income. In comparison to 1H15, the result also benefited from lower one-off charges not recurring in 2016 such as the impact of the change to the derivative valuation methodology adopted from 1H15.

Breakdown of Non-Interest Income (statutory basis)

NAB reported a decrease of $85 million (3.5 per cent) in non-interest income. Excluding foreign exchange movements, income decreased $111 million largely driven by markets and trading performance.




Included in the result is a $47 million decrease due to economic hedges offset in net interest income.

Wealth management and insurance

Wealth management and insurance income has been mixed across the majors, increasing by 0.2 percent to $4 billion. The majors have reported an increase in average funds under management (FUM), higher insurance margins and improved lapse rates in life insurance. However, this has been offset by the one-off deconsolidation of BT Investment Management by WBC in 2H15.

CBA reported increases in both insurance and wealth related income streams. Cash profit for its insurance segment contributed $487 million, an increase of 17.1 percent, driven by the CommInsure business which benefited from improved repricing, growth in in-force premiums and improved lapse experience. The other majors also recorded relatively strong growth in their insurance businesses in 1H16.

Funds under management fell across all the majors on average by 5.5 percent ($454.7 billion) attributable largely to the sale of BT Investment Management by WBC. Excluding this, FUM grew marginally by 1.4 percent on the back of positive net inflows. The result reflected continued strengthening in FUM on the back of favourable equity markets (compared, in aggregate, to last year) and investment performances further buoyed by investors looking for returns in the low interest rate environment.

Net Funds Management and Insurance Income




Capital

Increasing capital is a constant theme, as the majors are focused on meeting the regulatory requirements (and being ‘unquestionably strong’) and striking a sensible balance between capital adequacy and the efficient deployment of capital. The active management of capital is evident in the aggregate Common Equity Tier 1 capital (CET1) ratio increasing 68 basis points to 9.6 percent in the 1H16.

The need for ‘unquestionable’ strength is seeing the major banks recalibrate and lower their dividend payout ratios to align with more subdued business conditions and the ongoing need for greater regulatory capital levels. The last time banks took similar actions was during the GFC. This should not give rise to undue concern, but rather the majors are taking a more conservative and prudent approach to manage for the medium/longer term.

Moreover, the major banks are maintaining healthy buffers against specific Basel III ratios. The Liquidity Coverage Ratio (the amount of high quality liquid assets held that can be used to meet the bank’s liquidity needs for a 30 day calendar liquidity stress scenario) is running at an average of 126 percent versus the 100 percent minimum.

The Leverage Ratio framework is yet to be finalised internationally, although the Basel Committee's governing body agreed the minimum requirement should be 3 percent. The Basel Committee is expected to make final adjustments to the measure by the end of 2016, with a view to establishing the requirement from January 2018. The current Leverage Ratio for the majors is at an average of 5.1 percent comfortably above the minimum of 3 percent.

Capital adequacy metrics

Capital preservation is a strong theme in the latest half year results for the major banks




Costs

With continued pressure on margins impacting earnings, cost management remains a key focus for the majors. Costs have increased relative to revenues in the current period as the majors continue to invest in technology and digital platforms to enhance their customer’s experience and keep pace with market disrupters, while meeting the significant and ongoing costs of regulatory change (and as one off changes and increased impairments are incurred).

The major bank’s average cost to income ratio on a statutory basis rose 194 basis points to 44.6 percent9. Overall, while operating expenses have increased, this has largely been influenced by one-off items. The majors have reported that their investments in digital technology and automation, coupled with initiatives to simplify processes and remove complexity from products is improving their efficiency and productivity levels. The tension between competing priorities for investment seen in recent reporting periods remains as the majors continue to balance the need for investment in technology and innovation to meet customer expectations, and the ongoing demands of regulatory compliance programs.

Average Cost to Income Ratio

Other key factors influencing the cost result include:

• Restructuring expenses reflecting changes to business structure to increase efficiency, capability and reduce FTE costs;

• Remediation expenses reported by ASIC totalled $149 million in compensation for consumers and investors for the period June to December 2015;

• Impairment on divestment of non-core businesses;

9 Adjusted for specified items reported by ANZ, cost to income declined by 9 basis points to 42.6 percent.

Relatively faster growth of operating expenses compared to revenues can be directly attributed to the need for banks to continue to invest in meeting regulatory compliance obligations and enhancing digital capabilities




• Inflationary expenses, including 3.5 percent increase in personnel expenses; and

• Foreign currency translation expense due to lower Australian dollar impacting on foreign operations expenditure.

Technology

Technology costs have been a significant contributing factor to higher cost to income ratios. Increases in software amortisation expense, including additional charges attributable to shortened useful life periods, and impairments has increased software related costs for the 1H16. ANZ reported a $629 million expense (pre-tax) as part of an accounting change to the application of the Group’s software capitalisation policy10, following WBC’s move to directly expense a higher proportion of investment spend, announced in FY15.

While the majors continue to invest significantly in technology assets, capitalised costs have reduced by $380 million (before amortisation and impairment) to $8.2 billion reflecting the change in policy. The balance taken to profit or loss for the period continues to increase, reported at $1.4 billion (an increase of $623 million) as a result of the acceleration of amortisation costs reflecting the expected shorter life of technology with the rapidly changing technology landscape and impairment.

Furthermore, costs have increased across the board due to a continuation of regulatory programmes and enhanced compliance requirements requiring investment in new or modified systems.

Capitalised Software

10 ANZ have reported an increase in amortisation charges attributable to software capitalisation changes, including changes to capitalisation criteria related expenditure and directly expense more project related costs as a consequence of the rapidly changing technology landscape.




Personnel

Staff numbers have decreased in the first half of 2016, compared to 2HY15, across the majors by 1.94 percent to 164,314 FTE globally. Despite the decrease in headcount, total personnel related costs have increased by 3.5 percent to $10.5 billion, largely driven by inflation in salaries.




Return on Equity

In a lower growth environment, together with increased regulatory requirements (requiring majors to hold higher levels of capital) and rising loan impairments, it is becoming increasingly difficult for the majors to maintain their current level of industry returns.

Average ROE across the majors was down by 153 basis points to 13.8 percent (cash basis) for 1H16, compared with 15.3 percent in 2H15. The fall in ROE is consistent with expectations following the capital raising undertaken in 2015 by all the majors as a result of APRA’s response to the recommendations of the Financial System Inquiry (FSI) for capital levels to meet the ‘unquestionably strong’ target and moves towards an emerging Basel 4.

As illustrated below, this decline in ROE continues the trend observed since 2010 of a reduction in ROE relative to profits (10 years ago the majors had an average ROE above 20 percent).

Profit before tax against return on equity

The key themes restricting the level of cash return on equity in 1H16 were:

• Additional regulatory capital requirements by APRA in response to FSI recommendations effective from 1 July 2016 resulting in the majors introducing initiatives to increase capital during 1H16;

Industry returns are now bearing the brunt of increasing regulatory capital buffers over the past few years and are set to continue, putting further pressure on banks’ ability to grow




• Higher capital costs and lower yields due to increased holdings of high quality liquid assets associated with the transition to the Basel III Liquidity Coverage Ratio framework; and

• Higher operating costs, in particular, growth in personnel related costs, IT expenses, professional services and restructuring expenses reported for the period.

Dividends

ANZ and CBA both decreased their interim dividend in comparison to the 2H15 final dividend payments, while NAB held their dividend unchanged at 99 cents per share and WBC increased their dividend by 1 cent per share. This result reflects the majors resetting the market’s expectation, indicating a shift in the sustainable level of dividends. In doing so, the majors have balanced long-term stability of the dividend and maximising the utilisation of franking credits, against their stated intention to further strengthen their capital holding organically in response to increasing regulatory requirements.

Profit after tax vs Dividend per share







Acknowledgements

The following KPMG staff have made a significant contribution to the development of this publication.

• Ben Flaherty

• Dimi Kumarasinghe

• Michael Cunningham

• Danny Pang

• Michael Li

• Antonia Drake-Brockman

• Christopher Pedersen

• Sarah Ellem

• Davina Lawrence




Notes




Notes

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo and are registered trademarks or trademarks of KPMG International.


Contact us

Ian Pollari Partner Head of Banking, Australia +61 2 9335 8408 [email protected]

Andrew Dickinson Partner, Financial Services +61 2 9335 8952 [email protected] kpmg.com/au/majorbanks

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Documents

Major Australian Banks - KPMG | US · PDF file2 Major Australian Banks: ... banks recorded an average net interest margin of 204 basis points, up 1 basis point on 1H15 and 2 basis