Competitive pressures and rising costs weigh on margins
Australia’s four major banks recorded a combined post-tax profit of $29.9 billion for the 2024 financial year – a 5.7% decline compared to 2023, latest analysis from KPMG Australia has shown.
Return on average equity also dropped, falling 80 basis points to an average of 10.9%.
The major banks’ total assets grew by 4.4% over the past year, with loan portfolios increasing by 5.7%. Business lending led the way, expanding by 5.3%, while consumer lending grew by 2.1%. This growth, KPMG noted, reflects a level of confidence among businesses and consumers, along with expectations that interest rates may start to decrease.
“The majors’ full-year results demonstrate resilience despite competition continuing to squeeze margins during a period of sustained ongoing economic uncertainty,” said David Heathcote (pictured above), KPMG Australia’s newly appointed head of banking and capital markets. “The majors continue to grow their asset bases, and credit appetite remains strong despite cost-of-living pressures.”
While total operating income remained flat at $90 billion, net interest income dropped by 0.5% to $74.4 billion. Banks attributed the decline in margins to intense competition, particularly from non-bank lenders, which pushed the average net interest margin (NIM) down by seven basis points to 1.80%.
Operating expenses also rose significantly, with the average cost-to-income ratio climbing by 336 basis points to 49.2%. Total expenses increased by 5.3% to $44 billion, largely due to inflationary pressures on core costs such as personnel, partially offset by a slight reduction in investment spending.
Personnel costs grew by 3.5% to $25.4 billion as headcount rose by 0.8%. Meanwhile, technology spending saw a notable 15.2% increase, reaching $8.9 billion, as banks accelerated digital initiatives in response to rising demand for tech-driven banking solutions, particularly in areas like generative AI.
“We are at a critical digital juncture,” said Janine Woodside, financial services transformation partner at KPMG Australia said. “The ability to relentlessly orchestrate multiple, complex, concurrent changes while harnessing new technology will increasingly differentiate banks. And customers stand to be the winners.”
Meanwhile, expected credit loss (ECL) provisions grew by 2.8% to $21.5 billion, aligning with overall loan portfolio growth. ECL as a percentage of gross loans and advances declined by two basis points to an average of 0.65%, reflecting continued resilience among borrowers despite high living costs. The report noted that the anticipated “mortgage cliff” had minimal impact on credit quality, partly due to a rise in house prices in many areas.
Approximately 92% of the housing portfolio now consists of variable-rate loans, up from 66% in 2022 – a shift that could offer borrowers opportunities to secure loans at more favourable rates as the yield curve moves from flat to negative, according to KPMG.
Despite the stable overall credit quality, non-performing loans have increased slightly across the banks’ portfolios. Stressed credit exposures in business lending remain concentrated in the construction and agriculture sectors.
The banks’ capital and liquidity positions remain robust, with capital ratios well above regulatory minimums. The average Liquidity Coverage Ratio rose slightly to 134.5%, while the Common Equity Tier 1 ratio dipped by 19 basis points to 12.3%.
The major banks also declared higher dividends for FY24, with an average increase in dividend per share of 1.82%.
“Australia’s major banks are understandably looking at ways to reduce their cost base, as they look to preserve profits in a highly competitive environment where there is a continuing likelihood that NIM will remain under pressure in the medium term,” Heathcote said.
“Investment in technology and digitisation is happening at pace with the aim of creating sustained efficiencies together with an improved and differentiated experience for their clients. In the short term, this investment may have an adverse impact on profitability until the benefits are evidenced.”
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