Another strong year despite margin, cost pressures
Despite borrowers doing it tough following the latest Reserve Bank of Australia’s (RBA) cash rate rise, the country’s major banks have reported a combined cash profit after tax of $32.5 billion, up 12.4% compared to FY22.
The combined cash profits for the first half of FY23 amounted to $17 billion, compared to $15.4 billion for the second half of the year, according to data from KPMG’s full year 2023 report on CBA, NAB, ANZ and Westpac.
There was also a small increase in arrears which may reflect the challenging times facing many borrowers.
According to the KPMG Australian Major Banks Full Year 2023 Results Analysis, the RBA’s tightening of monetary policy was the key driver of net interest margins (NIM), which increased by an average of 9 basis points on FY22 across the major banks.
The average NIM for the majors was 1.90% in the first half year, which decreased to 1.84% in the second half of FY23.
In combination with an increase in interest-earning assets of 7.3% compared to FY22, net interest income increased by 13.8% to $74.9 billion.
Margins are however under pressure from both intense pricing competition, particularly in the home loan market, as well as the rising cost of deposit and wholesale funding.
Cash profits fall in second half, but major banks continue to do well, says KPMG
Steve Jackson (pictured above), head of banking and capital markets at KPMG Australia, said it had been another very strong full year result for the majors “which have continued to grow during the year, despite cash profits and net interest margins falling in the second half as strong competition and rising funding costs offset the benefits of higher interest rates”.
The big banks booked $2.8 billion in impairment charges in FY23, which is a turnaround from releases in FY22 and this contributed to a one basis point increase in the average provision as a percentage of gross loans and advances of 0.68% compared to FY22.
The main factor driving this increase was a shift in the forward-looking macroeconomic projections. The 90 day+ delinquencies as a percentage of gross loans and advances increased to 1.91% as compared to 1.73% in FY22.
KPMG report shows rise in arrears
KPMG Australian banking partner Maria Trinci said the major banks had reported a modest rise in arrears which suggested that interest rate rises, and the erosion of savings buffers may be starting to impact consumers.
“However, this rise remains small and from a record low base, demonstrating the resilience of Australian consumers and businesses to date,” Trinci said.
The average cost-to-income ratio decreased to 46.3% from 50.2% in FY22, which is primarily driven by an increase in income. However, operating expenses have increased by 3.9% compared with FY22 reflecting an increase in personnel costs by 8.2% from FY22 in line with an increase in headcount of 1.9%.
KPMG said investment spending had been relatively stable across all four Australian major banks, with an increasing share of investment in productivity and growth initiatives as the majors conclude the majority of their royal commission-driven remediation programs and seek to maintain growth whilst creating efficiencies.
Capital and liquidity ratios across the majors are well above regulatory minimums, demonstrating balance sheet and liquidity strength.
The average Liquidity Coverage Ratio (LCR) increased to 134.3%, up 3.75 percentage points from FY22, and the average CET1 is 12.5%, an increase of 87 basis points compared with FY22.
The majors declared higher dividend payments in FY23 with an increase in the average dividend per share of 15.7% compared to FY22, resulting in an average increase of 32c per share.
Notwithstanding the increase in dividend payments across the big four banks, the average dividend payout ratio has remained steady at 71%.
According to Kim Lawry, banking partner at KPMG Australia, the major banks further improved their strong capital positions during the year, “strengthening their ability to reinvest in the business and provide returns to shareholders in the form of share buy-backs and dividends”.
KPMG released a report earlier this year showing Australians were feeling the pinch of the RBA’s campaign to bring inflation back down to an acceptable level.
Key highlights of KPMG’s Australian Major Banks Full Year 2023 Results Analysis
- A combined cash profit after tax of $32.5bn for the full year, an increase of 12.4% percent on FY22. Combined cash profits for the first half of FY23 came to $17bn compared to $15.4bn for the second half. This reflects increasing net interest margins (NIM) compared with FY22
- NIM across the big four across increased in FY23 by an average of nine basis points compared with FY22. The average NIM for the majors was 1.90% in the first half, decreasing to 1.84% in the second half of FY23
- The average cost-to-income ratio decreased from 50.2% in FY22 to 46.3%, which is mainly attributable to the increase in income. But operating expenses rose by 3.9% compared with FY22 reflecting an increase in personnel costs
- Average provisions as a percentage of gross loans and advances increased in FY23 by one basis point compared to FY22 to 0.68%. This is due to an 8.9% increase in the collective provision, reflecting a shift in the forward-looking macroeconomic projections.
- The average Liquidity Coverage Ratio (LCR) increased to 134.3%, up 3.75 percentage points from FY22. The average CET1 ratio across the four banks rose by 87 basis points to 12.5% from FY22, showing continual strong capital buffers
- The major banks declared higher dividend payments in FY23 with an increase in the average dividend per share of 15.7% compared to FY22
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