KPMG analysis finds that the Australian major banks (‘the Majors’) have reported improved financials for the full financial year 2021, on the back of Australia’s economic recovery.
KPMG’s Major Australian Banks Full Year Analysis Report 2021 finds that the Majors reported a combined cash profit after tax from continuing operations of $26.8 billion, up 54.7 percent on FY20 (but down 2.3 percent on FY19).
Writebacks of collective provisions of $1.7 billion, compared to large collective impairment charges totalling $6.9 billion in 2020 in response to COVID-19, have had a big impact on the shape of the Majors’ profit results. The underlying performance trajectory is less turbulent than the headline numbers suggest. Total operating income (on a cash basis) was up 0.1 percent on 2020 and down 1.5 percent on 2019. This almost flat revenue picture is more consistent with the single-digit percentage decline of cash profits between 2019 and 2021.
It is clear that the Majors’ performance has seen a turnaround from last year, as the Australian economy entered a new phase of its COVID-19 pandemic response. After the Majors played a significant role in supporting Australia’s recovery in 2020, they benefited from the country’s improved economic performance in 2021. They will now need to turn their attention to transformation, as they look to their future performance.
Ian Pollari, KPMG Australia’s Head of Banking commented: “In 2021, the banks have been able to shift their focus from economic support to recovery. After stabilising themselves from the initial impacts of the pandemic, they now arrive at a new transition point. In 2022, they will need to start delivering on their transformation programs and positioning for a future that will be very different to the past.”
Continuing a recent trend, the Majors have reinforced their balance sheets even more. While they have resumed more generous dividend payments (with a dividend payout ratio of 70.0 percent, up from 52.3 percent in 2020 but still down from 81.3 percent in 2019), they continue to retain profits and proceeds from simplification divestments to further raise their CET1 ratio by 131 basis points to an “unquestionably strong” 12.7 percent. They managed to raise their capital levels while collectively buying back $13.5 billion worth of their own shares.
KPMG Banking Partner Maria Trinci added: “After the profit and dividend disruption of 2020, the Majors have reverted to returning significant sums to their shareholders. However, they are clearly continuing to balance dividend payments with balance sheet strength. Now the big question is how they will use their strong balance sheets productively in the future and unlock new sources of growth.”
Amongst this recovery, a number of key performance metrics clearly signal that the pre-COVID performance of the Majors will be challenging to maintain. While the average return on equity (ROE) has increased again to 9.9 percent, it is still down 138 basis points on 2019. A major driver of lower returns is the reduction in net interest margin (NIM) which is down 3 basis points on 2020 to 186 basis points as a result of low interest rates and stiff competition. And while the Reserve Bank of Australia’s (RBA) Term Funding Facility (TFF) has supported margins to an extent, it closed to drawdowns on 30 June 2021. Potential future interest rate increases by the RBA may provide the banks some relief from low lending rates, although many mortgage customers are anticipating these increases and refinancing their home loans at fixed rates.
And despite the fact that the Majors remain committed to their long-term costs efficiency targets, they have been unable to structurally reduce costs in 2021. While the average cost-to-income ratio decreased from 2020 by 116 basis points to 52.1 percent, the underlying cost efficiency ratio excluding notable items went backwards by 155 basis points. A number of factors including regulatory compliance requirements, ongoing customer remediation and increased processing volumes have resulted in strong FTE growth across all Majors.
Hessel Verbeek, KPMG’s Banking Strategy Lead, said: “At the same time as lowering their operating costs, the Majors will need to continue to invest in growth and transformation. This balancing act requires them to re-think and transform their operating models, especially through organisational simplification and greater levels of process automation and digitisation.”
Key highlights of the results are as follows:
- The Majors reported a cash profit after tax from continuing operations of $26.8 billion for the year, an increase of 54.7 per cent on FY20 and a decrease of 2.3 per cent on FY19. This increase is consistent across the Majors, reflecting lower impairment charges due to an improved economic outlook. Excluding the write-backs and the impact of the previous year’s provisions results in a more modest profit increase of 4.2 per cent.
- Preserving net interest margins (NIM) continues to be a challenge for the Majors, with the average NIM (cash basis) decreasing by 3 basis points compared to FY2020. The low interest rate environment and shift towards lower margin fixed rate products was offset in part by cheaper funding spreads through growth in retail deposits and the impacts of RBA’s Term Funding Facility (TFF) which was available for drawn down to Australian Banks until the end of June 2021.
- Cost-to-income ratios have decreased from an average of 53.3 per cent in FY20 to 52.1 per cent. Excluding notable items, operating costs increased by 3.6 per cent to $38.2 billion, reflecting ongoing elevated costs associated with regulatory, risk and compliance programs and a surge in lending applications.
- Improving economic conditions and lower than anticipated losses eventuating from COVID-19 saw an aggregated release in loan impairment expenses of $0.8 billion. This reflects a release of 11.9 per cent of the collective provisions raised in FY20, primarily in response to the pandemic. Total impairment provisions of $21.5 billion remain elevated compared to pre-pandemic levels as prudent buffers against potential ongoing uncertainty.
- The Majors continued to have strong capital buffers, with the average Common Equity Tier 1 (CET1) ratio increasing by 131 bps to 12.7 per cent. The strong capital position saw each Major announce share-buy backs totalling $13.5 billion during the period, in a move to deliver stronger returns to shareholders. Dividend pay-out ratios increased from 52.3 per cent in FY20 to 70.0 per cent in FY21, reflecting a stronger performance and increased clarity and confidence in the future. However, this remains lower than FY19 of 81.3 percent.
- Whilst recovering earnings has seen Returns on equity (ROE) increase on prior comparative period by 323 basis points to 9.9 per cent, this remains below previous double-digit standards experienced prior to the COVID-19 pandemic. Maintaining strong capital requirements in an environment with lower interest margins and high costs will continue to place pressure on ROEs for the foreseeable future.
2021 saw growth across both housing (up 5.2 percent on 2020) and non-housing lending (up 1.0 percent on 2020). Much of this growth has been the result of strong increases in house prices and underlying economic recovery. It is unclear if these trends will continue, especially if interest rates are raised in the 2022 financial year.
“The transformation imperative for the banks includes a revenue growth challenge. The Majors are all looking at new ways to create value that will better serve their customer needs while opening up growth opportunities. This will require them to genuinely innovate around their business models at the same time as ensuring their operating models are future-fit”, said Pollari.
