This was an article written by Michael Bennet and published in The Australian on 9 May 2014.
AUSTRALIA’S major banks are on track to post record annual profits of almost $30 billion, after near record low bad debts powered the big four to strong earnings in the first six months.
Rounding out the big four’s results season yesterday, NAB increased cash profit 8.5 per to $3.15bn compared with the same period last year. The result followed Westpac’s 8 per cent rise to $3.77bn and ANZ’s 11 per cent gain to $3.5bn. Commonwealth Bank, the only major with a December 31 year, grew earnings 14 per cent to $4.3bn.
The results put the banks on track for record annual profits of at least $29.5bn. While the major banks point to the billions they pay in tax and to shareholders, the financial system inquiry probing competition and regulation lurks in the background.
“They’re strong results, aren’t they,” ME Bank chief Jamie McPhee said to The Australian.
He has joined the smaller regional banks in calling on the inquiry to “level the playing field” by changing rules requiring smaller banks to hold more capital against mortgages and ending the majors’ alleged funding gains from being “too big to fail”.
“At the end of the day, what does strong profits and growth indicate? Good healthy margins,” Mr McPhee said.
While still about 30-40 basis points higher than the regional banks, the big four’s margins are coming under pressure from rising competition and record low interest rates. According to KPMG, the major banks’ net interest margins declined 5 basis points compared with the previous half-year period.
PwC Australia’s financial services leader, Hugh Harley, said margins were likely to erode further amid competition for lending and deposits and “subdued appetite” for new loans.
Analysts are also concerned that the banks’ combined bad debt charges of $1.8bn — helped by record low interest rates and less spending — cannot go much lower. Westpac’s bad debt charge of 38 basis points of non-housing loans was the lowest since 2000.
But the half-year results also indicated stressed and overdue accounts were rising, with 90 day-plus delinquencies rising 7 per cent over the previous period.
“While asset quality ratios show continued improvement for the majors, going forward they will need to remain vigilant as their credit risk management of 90 day-plus delinquencies start to climb and, in particular, interest rates begin to rise,” said Andrew Dickinson, KPMG’s Asia-Pacific head of banking.
ANZ chief executive Mike Smith said good loans got written in bad times, suggesting the “benign” outlook for bad debts could remain.
In turn, the biggest focus for the banks was when would customers’ slowly growing confidence result in higher demand.