Major banks' profits up 16%

Australia’s major banks are continuing to enjoy strong profits amid rising interest rates, but due to rising costs, these gains may be short-lived, a new report has found.

In its Australian Major Banks Half Year 2023 Results report, released on Monday, KPMG confirmed that the major banks reported a combined cash profit after tax of $17 billion, up 16.6% on the first half of 2022.

Monetary policy tightening was a key driver of rises in net interest margins, which had increased by 14 basis points year-on-year, to an average of 190 basis points. As a result, KPMG confirmed that net interest income increased by 17% compared to the first half of 2022, to $37.7bn.

Margins had returned “to levels not seen since 2019”, and interest earning assets had increased by 8.6% year-on-year, KPMG said in the report. 

But it noted that “intense pricing competition” in the home loan market and a “significant increase” in interest expense ($46.1bn, up from $8.7bn in the first half of 2022) driven by the rising cost of deposits and wholesale funding, puts bank margins under pressure.

KPMG Australia had of banking and capital markets Steve Jackson (pictured above) said that over the six-month reporting period, which followed net profit after tax of $14.4bn in the first half of FY22, banks had grown the volume and profitability of their loan books.

“However, this is now being offset to a degree by the more than 400% increase in interest expense compared with 12 months ago, driven by the rising cost of deposits and wholesale funding,” Jackson said.

Average provisions as a percentage of gross loans decreased by three basis points from the first half of 2022 and is one basis point higher than the end of the second half of the year. 

According to KMPG, compared to the first half of 2022, major banks had increased their impairment charges, particularly the collective provision, which it said was still being written back in 2022.

While specific provision charges were relatively stable, KPMG said the collective provision increase reflected ongoing inflationary pressures, rising interest rates and a continued softness in the economic outlook.

While credit quality remained strong, with delinquencies at their lowest level since 2018, through increases in the collective provision, major banks were signalling the potential for an economic slowdown, increasing unemployment and further falls in house prices.

Rising costs considered a challenge

Rising costs continue to pose a challenge to major banks, KPMG said. 

The average cost-to-income ratio dropped from 49.3% in the first half of 2022, to 44.3%, but overall, KMPG noted that operating costs increased 2.6% compared to the first half of 2022.

The decreasing cost-to-income (CTI ratio) was due to income growth outpacing cost growth, rather than costs falling in absolute terms, it said.

Employee expenses increased by 4% during the half-year, after remaining relatively flat during FY22, on the back of a 3% increase in headcount, while technology spend increased by 3%. Investment spending was relatively stable, however KMPG noted that had been an overall shift away from risk and compliance investment spend, with an increasing share of investment in productivity and growth initiatives.

“The majors’ overall cost base continues to rise, despite significant investment in digital capabilities. In this period the increase in revenue has outpaced the growth in costs, but there clearly remains a significant opportunity for the majors to decouple headcount and cost growth from revenue growth,” Jackson said.

Liquidity falls but still above minimums

While liquidity positions across the major banks were well above regulatory minimums of 100%, KMPG said that the average liquidity coverage ratio (LVR) dropped to 131%, down 100 basis points from the second half of 2022.

Balance sheet strength remained a core focus for the major banks, it said.  Average CET1 was 12.3%, an increase of 62 basis points compared with the second half of 2022, which KPMG said was driven by a “significant fall in share buy-back activity” compared with the first half of 2022.

“While the headline results for the period are positive for the majors, there are early signs of stress in the loan portfolio as a result of the soft economic outlook,” Jackson said.

Jackson said that major banks were seeing a margin benefit from higher interest rates but that this was being eroded by a combination of loan pricing competition, funding cost increases and a continued rise in bank costs.

Key highlights of the KMPG Half Year 2023 Results report were as follows:

• Combined cash profit after tax from continuing operations of $17bn, up 16.6% on 1H22 and 22.9% on 2H22.
• Average ratio of impaired loans continued to decrease in 1H22 to 0.21%, down 6 basis points from 1H22 and 2 basis points from 2H22. Over the half year, 90-day delinquencies also continued to decline.
• Average net interest margin (cash basis) of 190 basis points increased by 14 basis points compared to 1H22, and 10 basis points compared to 2H22.
• Cost-to-income ratios have decreased from an average of 49.3% in 1H22 to 44.3%.
• Operating costs increased by 2.6% to $20.2 billion, reflecting an increase in personnel costs and investment spend, although offset by lower remediation and provisioning costs.
• The major banks continue to have strong capital buffers, with the average Common Equity Tier 1 (CET1) ratio increasing by 62 basis points over the half-year to 12.3%.  The strong capital position saw two of the four major banks announce share-buy backs totaling $1.9bn during the half-year, in a move to deliver stronger returns to shareholders.
• The average interim dividend per share of 111c was an increase compared with 95c in the first half of 2022. Dividend pay-out ratios decreased slightly to an average of 65.2%.