What does growth look like in the “new normal”? · PDF fileWhat does growth look...
Transcript of What does growth look like in the “new normal”? · PDF fileWhat does growth look...
What does growth look like in the “new normal”?
PerspectivesMajor banks analysis November 2010
pwc.com.au/mba
PwC analysis of the major banks results for full year 2010
What would you like to grow?
2 Perspectives | Major banks analysis
• pressureonfeeincome,partlyduetolesslendingactivity,andpartlyduetoretailfeereductionsinitiatedbythebanks.
Verystronggrowthinwealthmanagementincomeof21.7%–largelybecauseofimprovedequitymarkets–andfurtherrepricingoflendingmarginswerepartialoffsetstotherevenueheadwinds.Inall,totaloperatingincomeroseby4.2%in2010,comparedto16.3%in2009.However,inthesecondhalftotaloperatingincomeremainedflat.
Ofthesetrends,thebiggestsurpriseforusishowweakcreditgrowthhasbeenoverthepastsixmonths.Inourlastreport,basedonMarch2010data,wethoughtthatwehadjustpassedthetroughincreditandthattherewouldbeasteadyincreaseincreditdemandthrough2010.Today,itlooksliketherecoveryincreditgrowthwasverymodest.Businesscreditisstillshrinking,andismuchweakerthanwouldhavebeenexpectedgiventhegeneraleconomicconditionsandthegeneralstrengthofbusinessbalancesheets,suggestingongoingcaution.Housinggrowthinthelastsixmonthshasbeentheweakestsinceanytimesincethede-regulation;infactweneedtogobacktotherecessionoftheearly1980stofindsuchsluggishgrowth.
Themajorbanks’fullyearresultsforthepastyearreinforceoncemorethecollectivestrengthandprofitabilityofourmajorbanks.Underlyingcashearningshaverisenby25.2%to$21.6billion,followingafallof2.4%inthepreviousyear.Averagereturnonequitywas15.0%,comparedwith13.3%in2009.Thelargestsinglecontributortogrowthinprofitwasthereductioninbaddebtexpense(down$5.6bor42%)aseconomicconditionsimproved.
Thepictureonincomegrowthislessrosy,particularlyinthelastsixmonths,andthispointstothedifficultrealitiesforourbanksastheycometogripswiththerealityofthepost-GFC“newnormal”.Thereareatleastfiveseparatesourcesofrevenueheadwindsforthebanksevidentintheseresults:
• remarkablylowgrowthincreditgiventhestrengthofeconomicactivityingeneral
• increasingcostofwholesalefunding,aspre-GFCfundingmaturesandastheAUDrises
• noreprieveonthecostofretailfundingthroughdeposits
• lessmarkettradingincome
Overview
Michael CodlingBankingandCapitalMarketsLeaderTel:+61(2)82663034Email:[email protected]
Hugh HarleyFinancialServicesLeaderTel:+61(2)82665746Email:[email protected]
PwC analysis of the major banks results for full year 2010 3
Theflip-sideofweakcreditgrowthhasbeenstronger-than-expectedgrowthincorebankdeposits,assistedbystillintensecompetitivepricingwhichisshowinglittlesignofeasing.Allowingforreclassifications,corebankdepositsgrewby9.9%intheyeartoSeptember,abovethehistorical7%-9%“centreofgravity”forcoredepositgrowth.Again,giventherapidgrowthindepositsthroughtheGFC,thefactthatdepositgrowthisstillsurprisingontheupsideisapointertoongoingconservatismforbothbusinessesandhouseholds.
Thecompetitionfordepositshashadasignificantimpactonthemajors’combinednetinterestmargin(NIM).There-pricingofloansmeantthattheNIMactuallyincreased3bpsyear-on-yearto2.25%forFY10;butaswedescribelaterinthereport,themarginshavesteadilydeclinedoverthepasttwelvemonths.Wethinkthemarginsqueezewilllikelycontinue,partlyduetothebanks’needtoroll/renewlong-termoffshoredebt.Muchwilldependontheircollectiveappetitetomakeout-of-cycleraterisestohomeloansinapoliticallychargedatmosphere.Atthetimeofwriting,itappearsthereisindeedsomewillingnesstodothis.
Allofthesetrendssuggestthatthepressureonbankrevenueswillcontinue.Expensesontheotherhandroseby7.6%in2010,andinconsequencecoreearnings(i.e.beforebaddebtexpense)rosebyonly1.5%.Infact,coreearningsdeclined3.0%inthesecondhalf.Hencethebanksareturningseriousattentiontocostcontrol.Tightlabourmarketsandotherinflationarypressureswillmakethistoughgoing.Butitisanimperative,andoneofthereasonswhythebanks’technologyplaysaresoimportant.
Atthesametimethebanksarealsohavingtocopewithaperiodofunprecedentedregulatorychange,togetherwithlevelsofpoliticalscrutinynotseensincetheaftermathofthe1990srecession.HigherliquidityandcapitalrequirementsunderBaselIIIwillinevitablyincreasefundingcostsandputpressureonreturnsonequity,whilethecollectiveimpactoftheotherregulatorychanges(fromcreditrulesthroughtowealthmanagement)willrequiresignificantinvestmentsandinsomecasesaddtoongoingexpense.ThereisariskthattheimpactoftherecentlyannouncedSenateinquiryintobankcompetitionwillplacedownwardpressureonmarginsandfees.
Whilethisadjustmenttothenewnormaliscreatingrevenueandearningsheadwindsforthebanks,itisequallysuggestingasmoothadjustmentpathfortheeconomy,assistedbystrongexportdemandforcommodities.Ourbiggestconcernhasbeenthattheneedforthebankstorelylessonwholesalefunding(bothoffshorelong-termfundinganddomesticshort-termfunding,fordifferentreasons)wouldrestricttheirabilitytomeetdemandforcreditasthatrecoveredthrough2011and2012,givenslowergrowthindeposits.Therecentevidencesuggeststhismightbelessofarisk,duetoweakerdemandforcreditandstrongergrowthindeposits,atleastoverthenextyearorso.Indeed,totalgrowthincoredepositbalancesintheyeartoSeptemberwasslightlygreaterthantotalgrowthinbankloans;inotherwords,coredepositgrowthfundedallnewbanklending.
ContinuedsmoothadjustmentfortheeconomywilldependontheongoinggrowthoftheAsianeconomies,particularlyChina.ThelastsixmonthshaveseengreaterconcernabouttheeconomicoutlookfortheUSeconomy(wheretherecoverymayhavestalled)andmanyEurozoneeconomies(whereausteritymeasureswillrestrictgrowth).
The post-GFC “new normal” is now biting on revenue growth
The PwC Banking Gauge predicts underlying cash earnings growth of 9.0% for FY11
Bad debt expense fell by $5.6 billion or 42%
Underlying cash earnings rose 25% to $21.6 billion
4 Perspectives | Major banks analysis
IthasalsoseenmorefocusbyoffshoreinvestorsonpossibleimbalancesintheAustralianeconomy,suchashousing.Allthesefactorshaveservedtoreinforceininvestors’mindsAustralia’sdependenceoncommoditydemandfromAsia,andhencetheriskiftheseeconomiesshouldcomeofftheboil.ThegoodnewsisthattheChineseauthoritiesseemkeentoslowtheireconomytomoresustainablelevels,astherecentincreaseinChineseinterestratesdemonstrates.Inamostuncertaininternationalenvironment,retaininginvestorconfidenceintheAustraliangrowthstoryisfundamentaltothebanks’accesstooffshorefundingatcompetitivepricing.
Continuedsmoothadjustment,bothforthebanksandtheeconomyingeneral,willalsodependonthephasedintroductionoftheBaselIIIrequirements.Thisisnowmuchmorecertainthansixmonthsago,especiallygiventherecentannouncementsthattherewillbelongphase-inprovisionsforthenewliquidityrequirements(2015inthecaseoftheliquiditycoverageratioand2018forthenetstablefundingratio).
Whiletherearemanyfactorssupportiveofcontinuedsmoothadjustment,weshouldnotbecomplacentaboutthemagnitudeofthetasksortherisks.TheGFC(i.e.mid-2007tomid-2009)wastheculminationofeventsandtrendswhichoccurredover20or25years(i.e.fromtheearly1980s),andwhichresultedinanunprecedentedbuild-upingloballeverage,inboththefinancialandnon-financialsectors(particularlyhouseholds),andinthepublicsectorofmanyeconomiesaswell.Whattook20or25yearstobuildupwillmostlikelystillbecastingashadowgloballyforadecadeormore.Householdindebtednessbyitsnaturetakesalongwhiletorepair–repayinghouseholddebtisaslowprocess,whilehouseholdincomestendtorisequiteslowlyaswell.Inmanycountries,ageingdemographics,sloweconomicgrowth,highlevelsofbothgovernmentdebtandunfundedpublicliabilitieswillmakethepublicsectorfinancingtaskextremelychallenging.Ofcoursetherearealsobright-spots,suchasthegenerallystrongshapeofcorporatebalancesheetsgloballyanddevelopmentin
emergingeconomies;butequallythereisnoevidentpathfordealingwiththefundamentaltradeandcapitalimbalancesbetweenWesternconsumingnationsandEasternsavingnations.Tothecontrary,TheEconomisthasrecentlyruna“currencywar”edition.Australia,andhencethefundingofAustralianbanks,couldbeparticularlyvulnerableifaprotectionistmoodtookhold.
Whileno-oneknowshowanyofthesefactorswillplayout,weremainconvincedhoweverbythefundamentalthesis–thathistorywillshowthattheGFCusheredinanentirelydifferenteconomicandfinancialeracomparedtotheso-called“greatmoderation”of1990sand2000s.
Wefeelthatthefullextentofthesechangeshasnotbeenfullyappreciated.WehopethattheproposedSenateInquiryintobankcompetitionisavehicleforpublicdiscussionoftheextentandnatureofthesechanges.Historically,banksdependedprettywellexclusivelyonbankdepositstofundlending.Duringthe20yearsorsoupto2007,anumberoffactorstranspiredtobreakthisnexus,butinawaywhichwasclearlynotsustainableglobally.Theessence(notnecessarilythedetail)ofcenturiesofbankingpracticehasnowbeenre-emphasisedinamuchcloserlinkbetweendepositsandlendingforthebanks.TheproposedSenateInquiryprovidesapowerfulwindowforpublicdiscussionoftheseimportanttrends.Availabilityoffundingisthenowmostimportantfactorinrelationtoimpactingcompetitioninlendingmarkets,whileconsumersarealreadytheclearbeneficiariesoftherestoredimportanceofdepositsthroughkeendepositpricing.
Theextentof“erachange”alsocreatesimportantissuesforbankstrategy.Wesummarisethischallengeinthephrase“fromubiquitytoprecision”.Whenstrongeconomicgrowthandincreasingdemandforborrowingprovidedbanksopportunityinvirtuallyallmarkets,therewasclearlygreattemptationforfinancialinstitutionstoadoptstrategieswhichexpandedtheireconomiesofscopeandreach.Successinamoresubduedandcautiouspost-GFCworldwillrequireamuchmorepreciseanddisciplinedapproach.AsSamuelBeckettsaid,
“Inthelandscapeofextinction,precisionisnexttogodliness”.
InAustralia,wewereclearlyfortunatethatourbankslargelyavoidedtheexcessesofscopeandreachundertakenbybankselsewhere.Equally,nowthathouseholdsarelookingtobemorecautiousaboutdebt,thatsteadyofsourceofbothrevenueandprofitgrowthovertwodecadesiscomingtoanend.Increaseddemandforcommercialandcorporateborrowingsmayhelpoffsetthis.
Inadeleveragingworld,andwithcapitalandfundingrestrictions,theAustralianbankswillneedtobemoreselectiveinfindingnewwaystoconnectwithcustomerstodriverevenueandprofitablegrowth.Thelargeinvestmentsintechnologyareclearlyonevehicleforthis,andindeedthedepthofcustomerinformationavailablewillbeanextraordinaryvehicleforprecisioninbothmarketingandcreditassessment.Thebanksarepushingthemobilehandsetrevolutionforthesamepurpose.
Largedomesticacquisitionsappearofftheagendaasapotentialfilliptogrowth.Offshoreexpansionsremainverymuchinplay,whereeachofthebanksaretakingquitedifferentapproaches.Sufficetosay,historyshowsthatthisisthearenawhereprecisionofunderstanding,incontrasttoubiquityofscopeandreach,isfundamentallyimportant.WhilethehighAustraliandollardoesnothelpthebanks’offshorefundingchallenge,itcertainlybenefitsanyoffshoreacquisitionobjectives.
Wealsosensethatthebanks’customers–fromcorporatesthroughtohouseholds–aretakingamuchmorecriticalperspectiveonhowbanksrespondtosustainabilityissues.Thepublic,media,andlegislativefocusontheseissuesisrisingquicklyandthebankswillbeexpectedtobeattheforefrontofbestpractice.
Asfortheimmediatefuture,thePwCBankingGauge–aconsensusviewacrossfiveleadingbankanalysts-predictsthatthefourmajors,willenjoyunderlyingcashearningsgrowthof9.0%inFY11and7.7%inFY12.
PwC analysis of the major banks results for full year 2010 5
After a period of deleveraging, the
“new normal” will involve (by historical standards) soft credit growth, high funding costs and increased regulation.
Revenues in FY10 were up
4.2% over FY09 but were flat in 2H10 versus 1H10. Future revenue growth is the biggest single challenge facing the majors.
Total costs in FY10
were up 7.6%. Productivity improvements and other cost initiatives are a must in the new environment.
The recently proposed Senate Inquiry will provide a valuable platform to articulate and consider the broader challenges facing the industry.
6 Perspectives | Major banks analysis
Combined Results Summary
adjustmentsaremadetothestatutoryresults.Thislasthalfwehaveseenafurtherincreaseinthenumberofsuchadjustments.
Theseadjustmentsincludesomerelatedtochangesinbusinesscomposition:
• Acquisitions-thebanksexcludeoneoffmergerandintegrationexpensesandfairvalueadjustmentsrelatingtoacquisitions.Wherepossiblethebanksalsoseektoadjustpriorperiodcomparativestoincludetheunderlyingperformanceofacquiredentitiesfromthebeginningofthecomparativereportingperiod.Whereverpossiblewehaveusedpro-formainformationinpresentingbothindividualbankandcombinedresults.
• Disposalsanddiscontinuedbusinesses–thebanksalsoexcludetheresultsofbusinessessoldduringtheperiodasthoughtheyweresoldatthebeginningofthepriorcomparativeperiod.Theysimilarlyremovefrompriorcorrespondingperiodstheresultsofbusinessthathavebeenstrategicallydiscontinuedduringtheperiod.
ThekeyelementsofthemajorbanksresultsfortheyeartoSeptember2010aresummarisedinthetablebelow.Themaindriversofthe25.2%increaseincombinedunderlyingcashearningsare:
• Moderategrowthinnetinterestincome,primarilydrivenbyvolumegrowthinhousinglendinginthefirsthalf.
• Solidgrowthinwealthmanagementincomeasimprovingequitymarketsleadtobothhigherfundbalancesandagrowthinnetinflows.
• Lowerfeeandcommissionsincome,andreducedfinancialmarketsincomeasmarketvolatilitystabilisedfromthehighlevelsof2009.
• A42%reductioninthebaddebtexpenseastheimprovedeconomicconditionscausedaslowdowninthedeteriorationofassetquality.
• Coreearnings(beforethepositiveimpactofthebaddebtexpense)wereup1.5%onFY09.
Likethebanks,wefocuson“underlyingcashearnings”–whichshouldallowamoreeffectiveassessmentoftheperformanceofthebanks’ongoingactivitiesperiod-on-period.Toarriveatunderlyingcashearnings,anumberof
ThebanksalsocontinuetoeliminatetheimpactoftheconduittaxcasesinNewZealand;andtheyhaveremovedexpensesassociatedwithbusinessrestructuringandchangeinitiativesthatarelargeandone-offinnature.AIFRSaccountingcontinuestogiverisetovolatilitythatthebanksremove.Suchadjustmentsinclude:thereinstatementofthevaluationgains/lossesontheirownshares(treasuryshares)heldwithintheinvestmentportfoliosofthewealthmanagerswhichareeliminatedunderAIFRS;andtheremovaloffairvaluegainsandlossesrelatinghedgecontractswhichdonotmeettherequirementsofAASB139forhedgeaccountingorarenotfullyeffective,theseareremovedonthebasisthattheywillreverseinfutureperiodstobematchedwithprofitsand/orlossesarisingfromthehedgeditems.Andonebankeliminatedalargetaxcreditrelatedtoapriorperiodmergerasitdoesnotreflectongoingoperations.
Four majors’ combined performance – A$ million – underlying cash earnings
2010 2009 10 vs 09 2H10 1H10 2H vs 1H
Netinterestincome 47,062 44,359 6.1% 23,486 23,576 (0.4%)
Otheroperatingincome 23,055 22,927 0.6% 11,573 11,482 0.8%
Totalincome 70,117 67,286 4.2% 35,059 35,058 0.0%
Operatingexpense 32,257 29,977 (7.6%) 16,413 15,844 (3.6%)
Coreearnings 37,860 37,309 1.5% 18,646 19,214 (3.0%)
Baddebtexpense 7,669 13,283 42.3% 3,039 4,630 34.4%
Taxexpense 8,499 6,663 (27.6%) 4,346 4,153 (4.6%)
Outsideequityinterests 89 103 13.6% 45 44 (2.3%)
Underlyingcashearningsaftertaxbeforesignificantitems
21,603 17,260 25.2% 11,216 10,387 8.0%
Statutoryresults 20,735 13,903 49.1% 10,926 9,809 11.4%
PwC analysis of the major banks results for full year 2010 7
Net Interest Income
Net Interest MarginsAsnotedabove,theriseinthebanks’combinednetinterestmarginfrom2.22%forFY09to2.25%forFY10hidesadifferenthalfyearlytrendwhichisperhapsmoreindicativeoftheirfuturedirection.Themarginsforthelastsixconsecutivesix-monthperiodshavebeen:1H08–2.05%;2H08–2.09%;1H09–2.14%;2H09–2.29%;1H10–2.28%;2H10–2.23%.Therecentdeclinereflectsincreasedtotalfundingcostsmorethanoffsettingthecreditre-pricingthattookplacelargelyduring2009.
Thematerialcomponentsofthechangeinthefullyearnetinterestmarginswere:
• MorecompetitivepricingofdepositsthroughoutFY10:-11bps(2H10-6bps).Banksarenowpayingsignificantlymorefordepositsthan12-18monthsago.Theaverageratefordepositsofalltermsiscurrently22bpsbelowofficialcashrates,whereastwoyearsagoitaveraged
morethan200bpsbelowofficialcashrates.Therewasaperiodaroundthemiddleoftheyearwherepricingcompetitionfordepositsseemedtoeasealittle,butitisnowveryevidentagain.
• Rollingthroughofhigherspreadson,andtermingoutof,wholesalefunding:-4bps(2H10-4bps)
– WholesalespreadshavestabilisedatlevelswellabovethoseseenpreGFC.Forexample,5yeardebtiscostingaround140bpsmorethanpre-GFC.FY10isthefirstyeartoseeasignificantproportionoflongertermfundingpricedatthesehigher(post-GFC)spreads,andthiscostwillriseincomingyearsastheremainderofthetermwholesalefundingisrefinanced.
– Extendingthetermofwholesalefunding–inordertoreduceliquidityrisk–attractedhighercreditspreads.ThestrongA$isfurtherexacerbatingthiscost.
Netinterestincomecontinuedtobeasignificantcontributortothemajorbanksoverallprofitability,growingby6.1%to$47,062mforthefullyear.Thisgrowthwasprimarilydrivenbyhousingvolumegrowthinthefirsthalf.Infact,thesecondhalfsawnetinterestincomecontracting$99m,or-0.4%,reflectingthetrailingoffinhousingvolumegrowthandthebuildingpressurefromrisingfundingcosts.Whilstthemajorbanks’combinednetinterestmargininFY10roseby3bpsto2.25%,halfyearlytrendanalysisindicatesthatmarginsarenowdeclining.Thedriversandcomplexitiesofmarginandvolumegrowthareexaminedindetailbelow.
Interest margins and loans & acceptances 1H05 – 2H10
ANZ
051.6%
2.1%
2.6%
3.1%
$100,000m
$200,000m
$300,000m
$400,000m
$500,000m
$600,000m
10
CBA
1005
NAB
1005
WBC
1005
Notes: WBC includes SGB from 1H08. Prior to 1H08, figures are for WBC only.
Gross loans & acceptances (right axis) Interest margin (left axis)
CBAincludesBankwestfrom1H09.Priorto1H09,figuresareCBAonly
8 Perspectives | Major banks analysis
• Higherlendingratesresultingfromthere-pricingofcreditrisk:+20bps(2H10+6bps).
• Combinedglobaltreasuryandfinancialmarketsoperations:-2bps(2H10-1bp).However,therewassignificantvariationbetweentheindividualbankswithsomerecordingpositivemarginimpactandothersanegativeimpactfromtheseactivities.
Weanticipatethatthedecliningmarginsevidentinthelastsixmonthswillcontinue,astheimpactofhigherwholesalefundingcostsflowsthrough,togetherwithongoingcompetitionfordeposits.However,muchdependsonassetre-pricing.Giventhebattleforbusinesslending,wedon’tanticipatemuchfurtherupwardrepricingofbusinessloanmargins.Anyhomeloanrepricingwouldbesubjecttomuchmediaandpoliticalscrutiny;butatthetimeofwriting,theout-of-cycleraterisesdeclaredyesterdaysuggestthereissomeappetiteinthisregard.
Deposits & Lending Bankinglending(totalloansandadvances)growthdeclinedfrom5.9%intheyeartoSeptember2009,to5.2%intheyeartoSeptember2010.Bycontrast,totalsystemcredit(whichincludeslendingbynon-banks)grewby3.3%intheyeartoSeptember2010comparedto1.8%intheyeartoSeptember2009,reflectingsomerecoverybynon-banklenders.
Totalcorebankdepositsgrew10.5%oversameperiod,downfrom14.9%intheyeartoSeptember2009.Theresultwasa290bpsimprovementintheaggregatedeposittoloanratiowhichreached64.4%atSeptember2010.
Lending VolumesThemostnoteworthyaspectoflendingvolumesisthattheirgrowthrateshaveremainedsolow,giventhestrengthineconomicactivityandemployment.GiventheemergencefromtheGFCwehadexpectedgrowthinlendingvolumestobestrongerinthesixmonthstoSeptember2010comparedwiththesixmonthstoMarch2010.Infact,acrossmanycategoriesloangrowthhasbeenweakerinthelastsixmonthsthanintheprevioussixmonths.
Interest Spreads (%)
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Mar-10
Jun-10
Dec-09
Sep-10-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
(%)
Small Bus Wgt Avg Rate based on Credit Outstanding Variable Home Loan Spread to 90 BBSW
90 day BBSW spread OIS Avg All Term Deposits Spread to 90 BBSW
Avg All Term Deposit Specials
Source: RBA
Source: RBA data
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
2000 2010200920082007200620052004200320022001
Total Housing Personal Business
Domestic Credit Growth (Annual % growth - 12 month rolling average)
Core bank deposits to bank loans % (monthly)
50%
52%
54%
56%
58%
60%
62%
64%
66%
Sep-2
002
Sep-2
003
Sep-2
004
Sep-2
005
Sep-2
006
Sep-2
007
Sep-2
008
Sep-2
009
Sep-2
010
Source:RBAdata
Source:RBAdata
PwC analysis of the major banks results for full year 2010 9
Housing LoansTotalhousingcreditgrewby8.0%intheyeartoSeptember2010,slightlyhigherthanthegrowthof7.6%inthepreviousyear.Housingloansnowrepresent58%oftotallending,upfrom55%ayearago(andfrom45%adecadeago).
Notwithstandinghistoricallylowgrowthinhousingcredit,themajorbankshavecontinuedtoincreasetheirshareoftotalhousingcredit,from74.33%ayearagoto76.56%inSeptember2010,reflectingtheirfundingandmarketstrength.Importantlythough,nearlyallthesegainscameinthefirsthalfoftheyear;havingincreasedshareby174bpsinfirsthalf,theincreasewasonly48bpsinthesecondhalf.ForthefirsttimesincetheGFCbegan,theAustralianregionalbanksheldsharesteadyinthesecondhalf(8.29%inSeptemberversus8.25%inMarch).PerhapsthemosttellingstatisticthoughisthattheNBFIsincreasedtheirmarketshareintheSeptemberquarterfrom8.24%to8.71%;againthefirsttimesincetheGFCbegan.WebelievethattheNBFIswillbeincreasinglyactivefromnowon,reflectingthefactthatanumberhaveadjustedtheirbusinessmodelstoapost-GFCworld.This,togetherwithcontinuedsupportforthesecuritisationmarketthroughtheAOFM,andotherpredictedreforms,willlikelylimitthemarketsharegainsavailabletothemajorbanksinaggregatefromhere.
Owner Occupied Housing Demandforowner-occupiedhousingloanshasbeenparticularlyweakinthepastsixmonths,havinggrownbyjust3.2%overthistime,thelowestsix-monthlygrowthratesincethedataseriescommencedin1990.Likewise,growthintotalhousing(owneroccupiedandinvestmentloans)hasonlygrownby3.5%inthepasthalf,comparedto4.5%inthesixmonthstoMarch.Infactwehavegobacktoearly1983tofindalowergrowth(series-lowof2.8%inthesixmonthstoJanuary1983),whenunemploymentwas9.3%(5.1%today),homeloaninterestrateswere13.5%(7.5%today),andwhereinaregulatedworldtherewerefewinvestmenthomeloans.Thiscanonlysuggestaverycautiousapproachbyhouseholdsto
takingonadditionalhomeloancommitments,somethingwhichisperhapsnottoosurprisinginlightofthechartabove,whichshowsinterestpaymentspaidonhousingasapercentageofafter-taxincomeoverthelast50years.Thecharthighlightsboththerapidincreaseinthosecommitmentsintheperiod2002-2007,relativetoprevioustrends,andthattheratioisnowapproachingall-timehighsoncemore.
Anotherfactorimpactingconsumersisthemediaattentionaboutwhetherthereisahousepricebubble,withcapitalcityhousepriceshavinggrownby11.5%onaveragebetweenSeptember2009andSeptember2010.Theveryextentofthepublicdebate,coupledwithwidespreadanticipationoffurtherinterestrateincreases,ismakinghouseholdscautious,especiallygiventhemediaattentiononhousepricefallsintheUSandelsewhere.Webelievecurrentlevelsofhousepricescanbesustained,solongasunemploymentremainslow,
assistedbystrongimmigrationandhousingconstructionremainingbelowunderlyingdemand.Thissuggestshoweveralongperiodoflowgrowthindemandforowner-occupiedhousinglendingashouseholdsrelyonrepaymentsand(likelymodest)growthinhouseholdincomestoreducethehighleverageexplicitinchart.
Fromapublicpolicyperspective,thisisclearlyamuchbetteradjustmentpaththanforinstancethatbeingexperiencedbyhouseholdsintheUS,wherehousepriceslooksettofallfurther.Italsosuggestssomecautionintighteningmonetarypolicydramaticallyfromtheselevels.
Fromabankperspective,itsuggeststhattheunderlyingcreditqualityofthehousingbookswillcontinuetoberobust.Butitalsosuggestsaverylongperiodofsluggishgrowthinhousingcredit.
Housing credit growth – % six monthly
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Housing interest payments as a % of after-tax income
0
2
4
6
8
10(%)
Jun-
1960
Jun-
1965
Jun-
1970
Jun-
1975
Jun-
1980
Jun-
1985
Jun-
1990
Jun-
1995
Jun-
2000
Jun-
2005
Jun-
2010
Source:RBAdata
Source:RBAdata
10 Perspectives | Major banks analysis
Investor HousingStrongerdemandforhousinginvestmentloans,reflectingareturnofbroadermarketconfidence,hastosomeextentoffsettheweaknessinowner-occupieddemand.Investmenthousingloanshavegrownby8.7%overthepastyear,comparedtothepreviousyear’sgrowthof2.6%.Indeedinthelastsixmonthsinvestorloanshavegrownby4.1%comparedtoowneroccupiedloangrowthof3.2%.Growthinthiscategoryseemsnowtobeslowingaswell,fromtherecentpeak4.6%recordedinthesixmonthstoJune2010.
Investmenthousingloansaccountfor30%ofallhomeloansandingeneraltendtotaketheircuefromtrendsinowner-occupiedhousing.Inparticular,rentalyieldsarelow(andquitesteady),soexpectationsofpriceappreciationarecriticalininvestmentdecisions.Giventhepicturepaintedabove,wedonotexpectasurgeindemandforinvestmenthousing,althoughtherewillalwaysbeexceptions.Forinstance,agreaterlatitudeforself-managedsuperannuationfundstoinvestinhousinghasseenanincreaseindemandfromthatsegmentinthepastsixmonths.
Insummary,thebanksfacesignificantheadwindsinrelationtodemandformortgages.Wealreadyareseeingthemajorbanksrespondtothiswithgreaterdiscountingofmortgagepricingrelativetoayearago,aswellassomereversalinmorestringentcreditstandardsintroducedduringtheGFC(suchashigherloan-to-valuationratios).
Theincreasedleverageofthehouseholdsectorhasbeenoneofthemostreliablesourcesofvaluecreationforthebankssincederegulation.Fortunatelythatincreasedleveragecanbeserviced,butinaggregateitismostunlikelythathouseholdswanttopushtheenvelopemuchharderandinsteadprefertoadoptacautiousstance.Weexpecthousingcredittogrowintherangeof5%–7%intheyearahead,roughlyinlineinwithgrowthinnominalGDP.Thereissomedownsideriskonthisnumber,shouldinterestratesrisefurther.WealsoseesomeabilityforsmallerbanksandNBFIstograduallyincreasetheirmarketshare,potentiallysupportedbyfuturepublicpolicy.
Other Consumer LendingOtherconsumerlendinggrewby2.8%intheyeartoSeptember,certainlystrongerthanthefallof5.5%recordedinthepreviousyear.Likehousingloans,however,growthwasstrongerinthefirsthalfyeartoMarch(3.5%)thaninthesixmonthstoSeptember(1.4%),impactedbyhigherinterestrates.
Themajorbanks’shareofthecreditcardshasfallen21bpsto67.7%atSeptember2010,asglobalplayerssuchasCitigroupimplementedbusinessstrategiestargetingthismarket.Themajorbanksshareofotherpersonallendingremainedsteady,growingjust8bpsto61.1%atSeptember2010.Macquariegainedmarketshareinthissegmentfromotherplayersasmarginlendingenjoyedarecoveryoffthebackofstrongerequitymarkets.
Business LendingTotalbusinesscredithasdeclinedby3.7%intheyeartoSeptember2010,comparedtoafallof4.8%inthepreviousyear.Giventhestrengthofeconomicactivityandreportedinvestmentintentions,andthatbusinessbalancesheetsaregenerallyingoodcondition,thisisweakerthanwouldbeexpected,particularlyinrecentmonths.Likeothercreditaggregates,therecoveryinbusinesscreditlookedtobeoncourseintheearlymonthsof2010.Inrecentmonths,itseemstohavelostsomemomentum,withbusinesscreditgrowthfallingby2.5%inthesixmonthstoSeptember.Officialcommentariessuggestthattheauthoritiesmayalsohavebeenalittlesurprisedbytheweaknessinthiscategory.
Webelievethatthereareanumberoffactorsbehindthisweakness:
• companiesaremakingprofitsagain,andtheirgeneralriskaversionisleadingthemtouseinternally-generatedfundstopaydebtdown;
• thetighteningofmonetarypolicyinlate2009/10onlyreinforcedthismood,andtherecentstrengthoftheAustraliandollarmaybehavingasimilarimpactincertainsectors;
• whilecommercialpropertyoverallisshowingsomestabilisation,inmanyregionsandsectorsitstillremainsveryweak,dampeningthedemandforthiscategoryofborrowing;
• muchofthestrengthineconomicactivityandinvestmentiscomingfromtheresourcessector,whichtraditionallydoesnotrelyheavilyonbankborrowingforfunding.Forinstance,RBAfigurespointtolendingtominingonlycomprising3%ofbanklending.
Thepointaboutstrongprofitabilityandinternalgenerationoffundsisveryimportant.HavingnotedthatprofitsintheJunequarter2010were18%higherthanayearpreviously,theRBAestimatesthatinternalgenerationoffundsforincorporatedenterpriseshasbeenaround10%ofGDPformuchofthepasttwoyears.Ina$1.3trillioneconomy,thisamountsto$130billionofinternally
0%
10%
20%
30%
40%
50%
60%
19761978
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
Ratio of housing to total credit
PwC analysis of the major banks results for full year 2010 11
generatedfunds;bynomeansinsignificantrelativetothe$700billionstockofoutstandingbusinesscredit.TheRBAalsonotesthatthemediangearingratioisnowarounditslowestlevelinmorethanadecade.
Inevitablytherehasbeensomedebateaboutwhethertheweakgrowthinbusinesscreditreflects“creditrationing”bythebanks.Theunder-estimationandconsequentlowpricingofriskwaswidespreadpriortotheGFCmeantitwasinevitableoncetheGFCcommencedthatcredittermsandpricingwouldtighten,especiallyinthosesegmentswheretheregionalbankshadbeenparticularlyactive.Totheextentthatthependulumswungtoofar,weareseeingsomepartialreversal.Ourassessmentisthatcredit-worthybusinessproposalsaredefinitelybeingsupportedbythebanksonappropriateterms.Consistentwiththis,theReserveBanknotesthatinthefirsteightmonthsof2010credittosmallbusiness(i.e.unincorporatedenterprises)increasedat6%onanannualisedbasis,fasterthantheoverallgrowthinbusinesscredit.
Theweakdemandforcommerciallendingisparticularlyrelevantinlightoftheweakoutlookforhousingcredit.Throughmuchofthepast25yearsthebankshavebeenabletorelyonstrongdemandforhousingfinance–ashouseholdsincreasedfinancialleverage–todrivebalancesheetgrowthinaveryprofitablecategory.Withdemandforhousingfinanceexpectedtobesubduedforanextendedperiod,thiswillinevitablyencouragethebankstofocusfurtheronopportunitiesforgrowthinthebusinessarena.AnumberofbankCEOshaveflaggedthattheyexpectdemandforcommercialandcorporateborrowingtoincreaseoverthenextsixmonths.
Thisinturnwillsetupsomeinterestingdynamics.First,thetopendofthecorporatesectorwillbeveryawareofalternativesourcesoffunding,especiallynowthatwell-ratedcorporatescanraisefundsoncomparable,orsomecasesevenbetter,termstobanksinthewholesalemarket.Second,corporatelendinghasoftenbeenquitechallengingintermsofsecuringanadequatereturnontherisk,andwithcapitalstillinshort
supplyforthebanks,thiswillcreatesomeinterestingtrade-offbetweenbalancesheetgrowthandreturnonequitymetrics.TheabilityofbankstosellcomplimentaryservicesinadditiontothelendingfacilitieswillbefundamentalfromanROEperspective.
Finally,economicuncertaintiescontinuetoloomlargeininvestmentdecisions,bothforlargeandsmallbusiness.Ongoingtalkaboutahousingbubbleisdoingnothingforsmallbusinessconfidence.
Themajorbankshavegrownshareofbusinesslendingby78bpsovertheyearto74.46%.GrowthwasparticularlystrongintheSeptemberquarter,althoughthiswasconcentratedinjustonebank(whichincreasedshareby186bpovertheyear).Theregionalbankscontinuetoloseshareinthismarket,whiletheforeignbankshaveheldsharequitesteady,indeedthemajorforeignbanklendershaveincreasedshare(especiallyHSBCandRBS).
12 Perspectives | Major banks analysis
Deposits VolumesJustascreditgrowthhassurprisedonthedownsideinrecentmonths,depositgrowthhassurprisedontheupside.GrowthcoredepositsfortheyeartoSeptemberhasbeen10.5%,abovetheupperendofour“centreofgravity”forcoredepositgrowthduringnormalmarketconditionsof7%-9%pa.Therecordedgrowthratehasbeeninflatedby$5bofcashmanagementtrust(CMT)balancestransferredbalancesheetbyMacquarieBankinAugust2010;withoutthattransfertotalgrowthwouldstillhavebeen9.9%.Afterthe15%+depositgrowthratesexperiencedinthepreviousyear,wethoughtdepositswouldgrowmuchclosertothelowerendofthe7%-9%rangein2010.Thestrongergrowthincoredepositsisanotherpointertotheextentofgeneralriskaversionatpresent.
Theextentofthestrongergrowthofdepositsrelativetolendingiswellillustratedinthechartbelowofcoredepositstobankloans.Havingmarkedtimeformuchofthetimesincethestartof2009,inrecentmonthsthatratiohas
risensharply,indeedincreasingbythreepercentagepointssinceMay2010.AsofSeptember2010,theratiositsat64.4%,alevelnotseensinceearly2002.TotaldollargrowthindepositsactuallyexceededdollargrowthinlendingintheyeartoSeptember,which,otherthanattheheightoftheGFC,waslastseennineyearsagointheanxioustimefollowingtheSeptember11attacks.
Incontrasttolending,themajorbankshavelostshareindepositsoverthepastyear.Theirshareofhouseholddepositswas81.44%inSeptember2010,comparedto82.10%ayearago;forbusinessdepositsthefallwasfrom83.59%to82.21%overthesameperiod.Forhouseholddeposits,Macquarie’sCMTtransferwasakeydriverofthereductions;butevenallowingforthatitisclearthatbothregionalandforeignplayersarebeginningtoslowlypickuptheirshareofhouseholddepositsagain.Thispartlyreflectsverycompetitivepricingfromsomeofthesesmallerplayers,andgiventhisisintegraltotheirstrategiesinsomecasesweexpectthistocontinueandsobealimitonthe
extenttowhichthemajorscanreducetheirowndepositpricing.Italsoreflectssomeincreaseddepositorconfidenceinthesmallerbankspost-GFC.Itwillbeinterestingtoseewhetherpotentialchangestothegovernmentguaranteeofdepositorschangesthis.ThecurrentarrangementsareduetoexpireinOctober2011.
Pricingfordepositshasremainedverycompetitive,andtentativesignsthatpricingcompetitioneasedalittleinthesecondhalfwereshort-lived.Thenegativecontributiontonetinterestmarginfromdepositsforthemajorbankswas6bpinboththefirsthalfandthesecondhalf.Anumberofbankscontinuetoofferratesabovethecashrateforboth“atcall”internetdepositsand90dayplustermdeposits,althoughabsoluteratespaidforlonger-dateddepositratesfellinthesecondhalfastheyieldcurveshifted.Asnotedabove,weexpectthatcompetitivepressurefromsmallerplayerswillcontinuetorestrictreductionsindepositrates.
Four Majors: Market Share as at 30 September 2010
ANZ CBA NAB WBC Major Banks
Sep-10 Sep-10vs
Mar-10bps
Sep-10vs
Sep-09bps
Sep-10 Sep-10vs
Mar-10bps
Sep-10vs
Sep-09bps
Sep-10 Sep-10vs
Mar-10bps
Sep-10vs
Sep-09bps
Sep-10 Sep-10vs
Mar-10bps
Sep-10vs
Sep-09bps
Sep-10 Sep-10vs
Mar-10bps
Sep-10vs
Sep-09bps
HousingLoans(1) 13.0% 40 51 25.9% (4) 36 13.3% 9 49 24.3% 3 86 76.6% 48 222
HouseholdDeposits(2) 14.0% 2 1 30.2% (104) (144) 13.6% 14 47 23.7% 10 30 81.4% (78) (67)
BusinessLoans(2) 18.0% (31) (35) 19.7% (49) 0 22.8% 198 186 13.9% (21) (73) 74.5% 97 78
BusinessDeposits(2) 17.1% 65 (45) 22.2% (36) 146 22.9% (2) (148) 20.1% (95) (91) 82.2% (68) (139)
Source: (1)APRAandRBA,(2)APRANote: CBAincludesBankwestandWBCincludesSGB. CBA1H10,2H09&1H09havebeenchangedtobein-linewiththeotherbanks.
PwC analysis of the major banks results for full year 2010 13
Total system credit growth in the second half was surprisingly weak, at only
2.2%. We expect 5-7% growth in FY11.
The majors will undoubtedly respond on various fronts – new business models, a focus on key clients, improved productivity, new niche or offshore markets, new pricing – to preserve their RoE in the “new normal”.
Risk aversion meant the majors benefited from resilience in the deposit market. Core bank deposits grew
9.9% in FY10.
Margins declined from 2.29% for 2H09 to 2.28% for 1H10 to
2.23% for 2H10. The outlook depends on asset repricing.
14 Perspectives | Major banks analysis
Implications of the Basel III rules for Australian banks
Oneofthemajordevelopmentsofthepastfewmonthshasbeenthereleaseofrevisionstotheproposedchangestotheinternationalfinancialregulationofbanks,knownasthe“BaselIII”rules.ItisexpectedthattheserevisionswillbeconfirmedbytheG20LeadersMeetinginSeoulinmid-November.
Whiletheproposedchangeshavemanydimensions,atthecoretheyrequirebankstoholdmoreandbetterqualitycapital,andlargeramountsofliquidassets,thanpriortotheGFC.Therecentlyannouncedrevisionstotheseproposalstendtomakethemsomewhatlessonerousandalsoextendtheirimplementationhorizon.
ThisbriefnotereviewstheimpactofthesenewrulesontheAustralianbanks.Inessence,thechallengefortheAustralianbankswillbemuchmorewiththeliquidityrulesratherthanthecapitalrules.TheconservativeapproachofAustralianbanksinrelationtocapitalhassetthemupwell;conversely,theirdependenceonshort-termwholesalefunding,andthelimitedsupplyofAustraliangovernmentsecurities,willmaketheliquidityrulesmorechallenging.Thislatterchallengeiswellrecognised,totheextentthattheBaselCommitteeisnowdevelopingaseparatestandardforjurisdictionswhichdonothavesufficienthighqualitygovernmentsecuritiesonissue.
FundamentaltotheBaselIIIrulesarerequirementsonthebankstoholdmorecapitalofgreaterquality.Inparticular:
• allbanksmustholdaminimumcommonequity(commonsharesandretainedearningslessdeductions–someofwhichwerepreviouslytakenagainstlowerformsofcapital)of4.5%ofriskweightedassets,andthismaybesupplementedbyPillar2requirements(setbyAPRAbasedonindividualbankriskprofiles);plus
• a“conservationbuffer”of2.5%,abovethe4.5%minimum,toabsorblossesduringperiodsoffinancialandeconomicstress.Drawingonthisbufferduringtimesofstresswillresultinconstraintsonearningsdistributions;and
• a“countercyclicalbuffer”rangingfrom0–2.5%ofcommonequity,determinedbyAPRAasrequired,forinstanceintimesofexcessivecreditgrowth.
Theresultofallthesemeasuresisthatthenewcommonequity(coretier1)ratiowillbeatleast7%.Inaddition,thebankswillwanttoholdtheirowninternalbuffer,
overandabovethisregulatoryminimum,aspartofnormalriskmanagement,particularlyasthesanctionsforgoingunder7%willinvolverestrictionsontheabilitytopaydividends.Wesuspectthatthisbufferwillbeintheorderof1%-1.5%.
Aswellastheserequirementsforcommonequity,thebanksarealsorequiredtoholdtier1capitaltoaminimumof8.5%(i.e.includingtheconservationbuffer,andofwhichatleast7%iscommonequity)andtotalcapital(i.e.tier1andtier2)ofatleast10.5%
Currentandhistoricaldataforthesemeasuresareshownonthenextpage.
Inadditiontoremindingushowmuchcommonequitythebankshaveraisedinrecentyears,thetableshowsthatthebanksareingoodshapeinrelationtotherequirements.Basedonourestimates,collectivelythemajorbanksjustaboutmeetthe7%ratioforcommonequitynow.Equallyhowever,anysensethatthebanksarecurrentlyover-capitalisedisclearlywrong,especiallygiventhattheywillwanttoholdabufferover7%.
TherelativelysolidpositionoftheAustralianbankscontrastswithmanyjurisdictionsoverseas,wherecapitalratiosarelessstrongandwheretheirregulatorshaveadoptedamuchlessstrictapproachtodeductionsthaninAustralia.Oursenseisthatthechangesinthetreatmentofdeductionsingeneralinoverseasjurisdictionsisbeingunderestimatedbymarkets;inotherwordsthattherewillbelargeradverseimpactsonmeasuredcapitalthancurrentlyestimated.
Wealsosuspectthattherewillbesomeupwardpressureonequitylevelsglobally.Forinstance,Switzerlandhasannouncedcapitalrequirementsonitsbanksinthehighteens.WebelievethattheBaselIIIrequirementsrepresentsomewhatofacompromiseonthepartofregulatorsinordertominimiseadverseimpactsoneconomicgrowth.AsLordTurner(ChairmanoftheFSA)isreportedtohavesaid–“Ifwewerephilosopherkingsdesigningabankingsystementirelyanewforagreenfieldeconomy,shouldwehavesetstillhighercapitalratiosthanintheBaselIIIregime?YesIbelieveweshould.”
Do the banks need to hold more equity?
Thenewliquidityrulesaredesignedtoensurebanks’fundingisonamoresustainable,long-termbasis,thusenablingbetterliquidityduringtimesofmarketturbulence,andinvolvetworatios:
• thenetstablefundingrequirement(NSFR)toensurebetterdurationmatchingofassetsandliabilities.Thiswillbeintroducedfrom2018,followinganobservationperiodstarting2012;
• theliquiditycoverageratio(LCR)torequirebankstoholdsufficienthighqualityassetstosurviveperiodsofseveremarketstress.Thiswillbeintroducedfrom2015,followinganobservationperiodstarting2011.
BoththesemeasurescreatechallengesfortheAustralianbanks.Thestablefundingrequirementisachallengebecauseitallowsminimalfundingofassetsthroughshort-termliabilities,whereasthebankshave,intheyearsleadinguptotheGFC,reliedquiteheavilyonshort-termfunding.APRA’sQuantitativeImpactSurvey(QIS)suggestedthatasofJuly2010(andbeforerecentannouncedmodifications),thebankshadanetNSFRof85%,shortofthebenchmarkof100%.Sincethat
timestronggrowthindepositsrelativetoassetshasimprovedthisratio,butshort-termfundinginwholesalemarketsbytheAustralianbanksinaggregatewillstillbeintheorderof20%oftheirassets,orroughly$350billion,comparedtolong-termwholesalefundingintheorderof$470billion.
TheliquiditycoverageratioisachallengeinAustraliabecausetheassetsmostliquidduringperiodsofmarketstressaregovernmentsecurities,andAustralia’sstrongpublicsectorfinancialpositionmeansthereisasmallpoolofgovernmentsecuritiesrelativetothesizeofbankbalancesheets.APRA’sQISindicatedthatthebankshaveacombinedLCRof38%,againwellshortof100%.
ThechallengefortheAustralianbanksinmeetingtheserequirementshasbeenmadesomewhatlessdauntinginthepastfewmonthsbyBaselCommitteeannouncementswhichmaketherequirementslessoneroustomeet.Forinstance,fortheLCR:
• therun-offratesofcertainretailandSMEdepositsduringperiodsofmarketstresshavebeenreduced;
• likewise,assumedoutflowsofcertainfundingfromcentralbanksandgovernmenthavealsobeenreduced;
• anewcategoryof‘level2’liquidassets(e.g.bondsofcertainpublicsectorenterprisesandcoveredbondsofotherbanks)havebeenintroducedandmayaccountforupto40%oftherequirement.
Despitethesechanges,thecoreissuefortheAustralianbanksfortheLCRistheshortageofCommonwealthGovernmentBonds,andtheReserveBankhasrecentlydescribedthecurrentproposalsas“still…unworkable”.TheBaselCommitteeiscurrentlydeterminingitsresponsetothischallengeforjurisdictionssuchasAustralia.
ThepositioninrespectoftheNSFRismuchthesame.RecentannouncementshaveeasedtheimpactoftheproposalsinrespectofjurisdictionssuchasAustralia,forinstanceinhowmortgagesaretreated.Nonethelessthepostponementoftheirapplicationuntil2018(followinganobservationphase)isanindicationoftheextentoftransitionrequired.
Impact of BCBS Capital Strengthening Rules on Australian Banks
Major Banks
Minimum 2H10 1H10 2009 2008 2007
Sharecapital$b 86.3 84.5 82.4 45.1 37.7
NewCommonEquityRatio% 7% 6.6% 6.7% 6.4% 5.4% 5.1%
CurrentCoreTier1Ratio% 11.2% 11.1% 10.7% 9.0% 7.8%
RevisedTier1Ratio% 8.5% 8.7% 8.5% 8.2% 7.2% 6.5%
CurrentTier1Ratio% 4% 9.3% 9.3% 8.9% 7.7% 6.8%
RevisedTotalCapitalRatio% 10.5% 11.4% 11.5% 11.3% 11.0% 10.2%
CurrentTotalCapitalRatio% 8% 11.4% 11.8% 11.5% 11.1% 9.9%
PwC analysis of the major banks results for full year 2010 15
Will the new liquidity rules bite on credit growth?
16 Perspectives | Major banks analysis
And so what are the implications for the banks performance?
Offshorewholesaledebtmarketsareunlikelytobetheanswer.WhileinrecentyearsthemajorshaveverysuccessfullyusedtheirAAratingstotaptheinternationalborrowingmarkets,thereisalimit;boardsandmanagementarenowreluctanttobemuchfurtherexposedtooffshoreinvestorsandhencevulnerabletoeventstheycan’tnecessarilycontrol.Atthesametime,therearerelatedquestionsaboutAustralia’sstructuralrelianceonforeignsavingstofundthecurrentaccountdeficit.
Aswenotedsixmonthsago,severalideasarebeingproposedanddebated.AnumberinvolvesomeformofmobilisingAustralia’slargeandever-
increasingpoolofsavingswithinsuperannuationfunds.Forexample,therehasbeenarenewedpushforachangetotheBankingActtoallowcoveredbonds,i.e.allowingbankstoissuebondssecuredbyring-fenced(inevitablyveryhighquality)assetsontheirbalancesheet.Australianinvestorsdemonstratedtheirappetiteforcoveredbondsafewweeksago,snappingupA$denominatedcoveredbondsissuedbyaCanadianbank.Coveredbondscouldprovideourbanksanotheroptiontoaccesslong-durationwholesalefunding,andadditionallythebondscouldpotentiallybetreatedas“eligiblesecurities”forLCRpurposes.
Theworst-casescenariowouldbewheretheNSFRrequirementscanonlybemetthroughthebanksrationingcredit(assets)tolessthan,say,growthinnominalGDP.Oncurrentspecifications,thisriskcannotberuledout,butwebelieveinpracticeitisalowrisk–RBA,TreasuryandAPRAareallacutelyawareofthisriskandgiventhelongleadtimesthetransitioncanbemanaged.Ongoingriskaversionbyborrowerswillmostlikelyhelpinthisregard;conversely,iftheauthoritiesfeelthatcreditgrowthisbecomingexcessive,theseratiosprovideanothermeanstoensurebalanceinthesystem.
Inaglobalcontext,theAustralianmajorshaveperformedverywellduringandsincetheGFC.Onatotalshareholderreturnbasis(capitalappreciationanddividendscomparedtoopeningshareprice)themajorsfaredsignificantlybetterthanalmostalltheirglobalpeersoverthelastthreeyears.
Thereisadiscussionthatwesternbankingsectorsneedtocontractfurther,andthatpotentiallythebestoutcomewecanhopeforislowgrowth.Thereisalsoanexpectationinsomequartersgloballythatthelogicofamoreriskadverseworldandamoreregulatedenvironmentforbankswilltranslateintolowerreturnsoncapitalforbankshareholders.Theextentofregulatoryreformmeansthatno-oneknowswithcertaintytheactualimpactonthebanksortheeconomy,andwiththatthepossibilityofsignificantnegativeunintendedconsequences.
TheimpactoftheBaselIIIreformsontheAustralianmajorscanbesummarisedinthefollowingover-simplifieddiagram:
• Capitalhasincreasedandwilllikelyneedtoincreasefurther
• Ahighleveloflower-yieldingliquidassetswilldepressreturns;andsoakupfunding
• Fundingmaybeconstrainedbybothavailabilityandappetiteandcouldthereforerestrictgrowth,outlastingthecurrentshort-termconcernsofasluggishcreditmarket;andremainsexpensive
• Henceweexpecttheretobepressureonlonger-termreturnsonequity.
Nodoubtthebankswillrespondtothesechallengesonvariousfronts–newbusinessmodels,afocusonkeyclients,improvedproductivity,newnicheoroffshoremarkets,newpricingstrategiesetc.Oneoftheinterestingthingsaboutmoreregulationisthatitactuallyincreasesthebarrierstoentryforpotentialcompetition,andhenceprotectsthemajors.Whichisonereasonwhythecurrentpoliticalshenanigansaresuchcompellingviewing.
Capital increasedcapital
PressureonRoEs
depressedreturns
constrainedgrowth
Liquidity
Funding
16 Perspectives | Major banks analysis
PwC analysis of the major banks results for full year 2010 17PwC analysis of the major banks results for full year 2010 17
18 Perspectives | Major banks analysis
Wealth Management Thebanks’wealthmanagementbusinesses–whichcomprisefundsmanagementandinsuranceoperationsofthebanks–deliveredastrongperformance.Revenueshavestartedtoreboundwhileatthesametimeincreasesincostswerewellcontained.
Thekeycatalystsforimprovementinfundmanagementperformancehavebeenthepositivenetinflowsoffundsandtheslowlyimprovinginvestmentmarkets.Whileinvestorsarestillcautiousaboutthemarketoutlook,andtheleveloffundinflowsarestillrelativelylow,theyareslowlyrepositioningtheirportfoliostowardslessdefensiveassetsrelativetotheextremelyconservativestanceimmediatelyaftertheGFC.Cashholdingsarestillveryhigh.
Thebank-ownedwealthsectormaintainedretailmarketsharethroughouttheyearatapproximately62%.Thefourmajorbankscontinuetoleveragetheirbrandstrength,customerreach,diversedistributionandscale,whiletheGFCanduncertaintyregardingtheimpactofregulatorychangesonfinancialplanningorganisationshavealsoprovidedselectedopportunitiestogrowthroughacquisition.
Theoveralltoneinrelationtoopportunitiesforacquisitionhashoweverchanged,followingtheAustralianCompetitionandConsumerCommission’s(ACCC)blockingofNAB’sproposedacquisitionoftheAustralianandNewZealandlifeandwealthmanagementoperationsofAXASA,duetoconcernsabouttheimpactoncompetition,particularlyintheretailinvestmentplatformmarket.ThispositioningbytheACCCmayemboldennewentrantstothemarket,especiallywiththeprospectofthesuperannuationguaranteechargebeingliftedto12%.KohlbergKravisRobertssignalledaninterestinbecomingasignificantplayerintheAustralianfundslandscape,throughitstiltforwealthmanagerPerpetual.
Theliferiskinsurancesegmenthascomethroughtheglobalfinancialcrisisingoodshape.Newbusinessovertheprevious12monthshasbeenstrong,asisoftenthecaseduringperiodsofincreasedriskawareness.Atthesametime,concernsoveranincreaseinclaimsresultingfromhigherunemploymenthaveeased.
What’s new in the regulatory space?Postthe2010electionwehaveseenincreasedfocusintheindustryontheFutureofFinancialAdvice(“FOFA”)proposals(formerlytheRipollenquiry),theCooperReview,NationalConsumerCreditProvisions(NCCP)andPrivacyActrecommendations.
TheFOFAproposalsimplysomereshapingoftheadviserindustry,andthereisstillmuchuncertaintyinrelationtothebanningofcommissionsandthepracticalrequirementsforthedutytoactasafiduciarytoaclient.Thebanksarecomparativelywellplacedtomeettheincreasedcompliancerequirementsinanefficientandcost-effectivemannergiventheirscale.
TheCooperReview’srecommendationsalsoimplyasubstantialreshapingofthesuperannuationindustry,butsignificantelementsmaybeimpactedbythedifficultyoftheirpassagethroughafinely-balancedFederalParliament.ThemessagescomingfromtheGovernmentonthisaresomewhatmixed;veryrecentlytheGovernmenthasbeensignallingmoredeterminationonpushingthroughthefullsuiteofchanges.“Superstream”(whicharedesignedtoachieveindustryefficiencies)aremorelikelytoachievebi-partisansupportthanthe“MySuper”proposals(whichaimtoprovide“nofrills”superannuationoptions).
ASIChasalsoforeshadowedchangestotheregulatorycapitalrequirementsforresponsibleentitiesofmanagedinvestmentschemesinvolvingcapitalincreasesofover100%forlargerplayerssuchasbanks.
Other Operating Income
Contribution to other operating income
FY10 FY09 FY08
Bankfees&commissions 47.3% 50.7% 52.9%
Tradingincome 9.8% 16.0% 10.4%
Wealthmanagementincome 37.3% 30.8% 32.1%
Other operating income was up 0.6% on FY09 and now represents 32.9% of total income, down from 34.1% in FY09. Bank fees and commissions fell 6.2% and trading income suffered a significant decline of 38.6%. Both of these adverse trends were offset by growth in wealth management income, up 21.7%.
PwC analysis of the major banks results for full year 2010 19
Thefundsmanagementindustrystillcontinuestoworkthroughtheissuesof“frozenfunds”triggeredbyilliquidityduringtheGFC.Someinvestorsremainunabletoaccesstheirinvestments.MostresponsibleentitieshavenowputinplacehardshipprovisionsinconjunctionwithASICtoallowforreleaseincertaincircumstancesoffundstocertaininvestorsfromcashreserves.
Wealth management – OutlookImprovingtheconsumerconfidenceinsuperannuationcontinuestobeachallenge.IntheFSC/PwC2010CEOSurvey,CEO’sidentifiedthatthemostimportantfactorsinregainingconfidenceinsuperannuationarestabilityoflegislation,betterdisclosureandamoreefficientsystem.
Improvedinvestmentperformancewasalsoidentifiedasimportanttoregainingconfidence.Theindustryhasatoughbalancingacttoundertake.Ononehand,thefragilityininvestmentmarketsentimentimpliestheneedforwealthmanagerstofocusondeliveryoftheircoreofferingstocustomersexceptionallywell.Withexpectationsofaperiodoflowerinvestmentreturns,meetingtheneedsandexpectationsofclientstothehighestpossiblelevelwillbekey.Whileontheotherhand,thecombinationofconsiderableregulatoryuncertaintyandtheongoingneedtoadjustbusinessmodelstoapost-GFCmarketsenvironmentwillmakethisverychallenging.
Theproposedincreaseintheminimumemployersuperannuationguaranteecontributionfrom9%to12%willsupportfurthergrowthintheindustry.However,theimpactofthisgrowthmaybesomewhatoffsetbythecontinueddownwardpressureonfees.
Theremovalofcommissionscouldfavourthebank-owneddistributionmodelovertheindependentdistributionmodel.Theabilityofbankownedadviserstoleveragetechnologyandbackofficeserviceswillbecomeanimportantdifferentiator.Bank-ownedadviserbusinessesaregrowing,witheconomiesofscalebeinganimportantfactorintheadvicemarket.
Improvingthepenetrationofotherbankingproductswithintheirgrowingwealthmanagementclientbasewillcontinuetobeakeyfocus.Technologyisbeingusedtobettersupportcustomersthroughtheprovisionofweb-basedapplicationsthatprovidethecustomerwitha“wholeofbank”viewoftheirrelationshipwiththebank,includingtheirsuperannuation/investmentaccounts.
Thegrowingdemandforcashandfixedinteresttypeproductsmayprovideanimportantsourceoffuturefundingforbanks.Theproportionofsuperannuationfundsassetsheldincashhasrisento15%,wellabovethedecadeaverageof9.2%.Whilethereisstillapost-GFCeffecthere,weexpecttheproportionofnon-equitiessuperannuationallocationstoincreaseasthepopulationcontinuestoageandmoreinvestorsmoveintoretirementandseektoinvestinlowerriskproducts.
Bank Fees and CommissionsIncomefrombankfeesandcommissions(whichcompriselendingfeesof$3,993millionandnon-lendingfeesandcommissionsof$6,919million)decreasedby6%overFY09,andby2%for2H10versusto1H10.
Theoveralldeclinewasdrivenbynon-lendingfeesandcommissions(-9%overFY09).Akeydriverofthiswasthereductionorabolitionofnumerousfees–includingunpopularexceptionfees–whichhasbeenundertakenbythebanksforbothpositioningandcompetitivereasons.Whilethishasbeenwellreceivedbyconsumersandmedia,theimpactoffeerevenueisapparent.
Otherfactorsimpactingthedeclineinfeesandcommissionshavebeenmoresubduedlevelsofsecuritybrokerageandcertainadviceservices,theimpactofchangestoATMinterchangerules,andongoingfeecompetition.
LendingfeesfellslightlycomparedtoFY09,largelyareflectionoftheweakeningcreditdemand.
Trading IncomeTradingincomefell38%to$2,254minFY10,reflectinglessmarketvolatilityandreduceddemandforriskmanagementservicescomparedtoFY09.However,FY09wasanexceptionallyvolatileyear,andinfacttheFY10resultwasmuchthesameasFY08($2,225m)andFY07($2,329m).TheFY10resultwasalsoimpactedbythestrengtheningoftheAussiedollarwhichreducesUSdenominatedincomeinAUDterms,offsetsomewhatbynarrowing(butvolatile)creditspreadsonderivativemark-to-marketassets.
WhileallthebanksrecordedfallsintradingincomeinFY10,therewassomevariabilityintheextent.Weestimatethattheunderlyingdecreaseintradingresultwasdownabout20%,consistentwithsomemarketdiscussionthroughtheyear.Theprovisionofriskmanagementservicesremainsanimportantareaforthebankstodeepencustomerengagementinapost-GFCworld.
20 Perspectives | Major banks analysis
Efficiency
lineforcustomerserviceinitiatives(includingexpandeddistributionoffshoreinthecaseofonebank),inriskandcompliancetoaddressongoingregulatorydevelopments,andinprojectdeliveryforthelarge-scaleprojectsthebanksarerunning.
Higherstaffcostsalsoreflectthemarketconditionsandcompetitionfortalent,togetherwiththeimpactofthebanks’improvedfinancialperformanceonincentivesincludingequitybasedcompensation.Plusthereweresomehighercostsrelatingtodefinedbenefitsuperannuationfunds.
Propertyandequipmentcosts(10%oftotalexpenses)wereup4.0%overFY09,whichincludednewandrefurbishedkiosks,branchesandATMs.
Technologycosts(10%oftotalexpenses)werethebiggestriser,up11.8%overFY09.Allofthebankshaveinplacemajorinvestmentstoenhance‘aged’technologyinfrastructureto
supportstrategicpriorities–withamajorfocusbeingimprovingcustomerservice–andtodriveproductivityefficiencies.
Weexpectthisongoinginvestmentintechnologytocontinueforthenextthreetofiveyears,withtheimpactonprofitdependentonexecutionsuccess.Whilethedriversaresimilar,eachbankhasadoptedadifferentapproachtotheirdevelopmentandmigrationpaths,andconsequentriskmanagement.Indeedthisinvestmentintechnologywillhaveapronouncedimpactontherelationshipthatbankscanhavewithcustomersandthechannelmixappropriatetoservicethem.
Atthehelicopterlevel–recognisingtherevenueheadwinds–themajors’abilitytoreduceunitcostsiscritical.Investorsandanalystswillbejudgingbanksontheconfidencetheyhaveinmanagementtoexecuteontheircostsplays;andthereisarealopportunityforthebankstodifferentiatebysubsequentlydeliveringontheirpromises.
Total bank operating expenses increased by 7.6% over FY09. Consequently the banks’ combined expense to income ratio increased to 46.0% compared to 44.6.% for FY09. In fact, this ratio has now increased for four consecutive halves – and is rightly a key area of attention, particularly given the sluggish outlook for revenue growth.
Salariesandrelatedcosts,whichrepresent57%oftotalexpenses,wereup9.2%onFY09.Theincreaseincostsreflectshigheraveragestaffnumbers,upby6.4%onFY09.Thiswasprimarilyattributabletoincreasedstaffinthefront
Reported expense to income ratio
2010 2009 2008
ANZ 45.0% 44.8% 44.0%
CBA 45.7% 46.4% 48.9%
NAB 45.9% 43.9% 46.9%
WBC 41.2% 40.1% 43.3%
PwC analysis of the major banks results for full year 2010 21
Asset Quality
Atasegmentlevel,thecorporateandinstitutionalportfoliosperformedparticularlywellforthesecondhalfyearinarow.Withnonewlarge“badboys”emerging,theremainingportfolioqualityappearsgenerallysound,reflecting“survivorbias”.
ThemiddlemarketandSMEportfolioshavealsoheldupwell,albeitthereisevidenceofmorelossesnowemergingfromthesebooks,whereweakerentitieshavelostthelongbattletosurviveintheaftermathoftheGFC.Thelossesarestilllessthanoriginallyfeared,butenoughforbankmanagementtoremaincautious.Thankfullytheexposurestocorporaterealestate–whichwererearingasapotentialmajorheadache–seemtohaveturnedthecornersomewhat.Ingeneralthedeclineinpricesandrentsacrossmostsectorsappeartohaveslowedsignificantlyandinmanysectorsstabilised.
Thetailoftheeconomicdownturncontinuedtoripplethroughtotheconsumerlendingportfoliosduringtheyear.However,inrecenttimesthearrearshaveremainedrelativelystable.Onhousing,thebigtalkingpointlatelyhasbeenwhetherornotthereisahousingbubble.
WhileAustralianhousepriceshavemorethandoubledinthepastdecade,simplecomparisonstotheUSandUKmarketaretoosimplisticandnotappropriate.Forastart,wedon’thavecitieswhicharemassivelyoverbuilt.Ourbankswerenotlendingtoraftsofpeoplewhoquiteclearlycouldn’taffordtorepay.AndthebankshavenotbeenapplyingLVRssignificantlyinexcessof100%.
Thebanks’resultsforFY10weresignificantlybolsteredbya$5.6billionreductioninbaddebtexpense(BDE).TheaggregateBDEof$7.7billionrepresents42bpsofgrossloansandacceptances,downfrom76bpsforFY09.Thesecondhalfwas34bps,followingafirsthalfof52bps,trendingbacktowardsthelong-termratioof25-30bps.
WhiletheBDEreduced,thequalityofthebanks’loanportfoliosinfactcontinuedtodeteriorateslightlyduringthecourseoftheyear,asexpectedaswemovethroughthetailoftheGFC.Consequentlywe’veseenthattotalloanlossprovisions–thesumoftheindividuallyassessedprovisions(IAPs)pluscollectiveprovisions(CPs)–havecontinuedtoincrease.However,therateofincreasehasslowedconsiderably,withaconsequentreductioninBDE.
Asexpectedatthisstageofthecycle,grossimpairedassetsgrew17%overtheyear,tonowrepresent124bpsofgrossloansandacceptances.IAPscorrespondinglyincreased16%from$6.0billionto$7.0billion.
Ontheotherhand,CPsgrewonly3%from$12.9billionto$13.3billion,andinfactreducedinthesecondhalf.Thisisalsonaturalatthisstageofthecycle:CPsareestablishedforthosebaddebtsalreadyincurredbutnotyetidentified;andastheloanssubsequentlybecomeidentifiedasimpairedassets,theCPsareconvertedintoIAPs.
Likewisewealsobegantoseethereleaseofsomeofthemanagement/economicoverlayscarriedwithintheCPs.Thishasnotbeensignificant–whichisappropriategiventhecontinuinguncertaintywiththeeconomyandothersystemicdriversofportfolioquality–butit’saninterestingpointertothefuture.
Four majors: impaired assets and bad debt expense
Notes:Pre2006AGAAP;post2006AIFRS
1992
0%
1%
2%
3%
4%
5%
6%
7%
0%
0.5%
1%
1.5%
2%
2.5%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Impaired assets / gross loans & acceptances (left axis)Bad debt charge / gross loans & acceptances (right axis)
22 Perspectives | Major banks analysis
Solongasunemploymentlevelscontinuetoholdup,wearenotexpectingasharpfallinhousepricesinAustralia.ThisviewappearstobesupportedbytheReserveBank.TheirmostrecentHouseholdIncomeandLabourDynamicsinAustralia(HILDA)surveyindicatesthatalmosttwo-thirdsofhouseholdswithowner-occupierdebtfacedrepaymentslessthan30%oftheirdisposableincome,andthataroundhalfofallhouseholdswereaheadoftheirscheduledrepayments.Thishelpstoconfirmthatthedebtburdenisgenerallymanageableforhouseholds,althoughtherecanbenounduecomplacencygiventheflip-slideisthatmorethanonethirdofthosehouseholdshaveadebtloadinexcessof30%ofdisposableincome.
OtherpotentialshadowsonthehorizonincludetheimpactofthestrengtheningAussiedollaronoffshoretrade-exposedsectors.Thebanksarealsoholdingalargestockofimpairedassets,andmuchoftherelatedsecuritywillmostlikelycomeontothemarketinduecourse.Weexpectthebankstocontinuetoadoptameasuredapproachtothis.Oneofthepositivefeaturesofthisdownturnhasbeenthepreparedness(andability)ofbankstosupportbusinessesandholdoffforeclosingtoallowtimeforremediation.ThishashelpedcontaintheBDE.However,ifalotofassetsdidhitthemarketatthesametime,itcouldseriouslydepressprices.
Onbalance,weexpectthatbaddebtexpenseswillcontinuetoreducenextyear.Indeedweexpectthatintimetheymaytrendlowerthanthe25-30bpslong-termaverageforthesimplereasonthatsomuchofthebalancesheetisnowheldinlessriskyhomeloans.Butyear-on-yearwearenotgoingtoseearepeatofthisyear’s$5.6billionreductioninBDE.
PwC analysis of the major banks results for full year 2010 23
Key banking statistics – Full Year 2010
AllfiguresinAUDmillionunlessotherwiseindicated
(i) Inarrivingat“underlyingprofit”,incomeandexpensesexcludesignificantitemsandcertainnoncashitems.Noncashitemsincludeprovisionalgainsonacquisitionofcontrolledentities,impactofhedgeaccountingandrevaluationoftreasurysharesandotheritemsreportedbythebanks.Significantitemsincludethegainsondisposalofbusinesses,non-continuingbusinesses,restructuringandtransformationcostsandotheritemsreportedbythebanks.Somecomponentsofincomeandexpenseshavebeenreclassifiedtoimprovecomparabilitybetweenbanks.
(ii) Statutoryresultasreportedbythebanks,unadjusted.
(iii) ANZacquiredtheremaining50%ownershipofINGAustraliaon30November2009.ANZprovided“proforma”resultsfor2009and2010asthoughINGAustraliawasownedfrom1October2009.WehaveusedthisproformainformationinreportingANZ’sresultsabove.ANZalsoprovidedadjustmentseliminatingtheimpactofmovementsinforeignexchangeratesontheircomparativeresults.Inordertomaintainconsistencybetweenbankswehavenotsoughttoremovetheseimpactsinreportingtheirresultsabove.
(iv) CBAacquiredBankweston19December2008.CBAhasprovidedcomparativesfor2009reflectingtheresultsofBankwestasthoughithadbeenacquiredon1July2008(proformainformation).WhereverpossiblewehaveusedtheproformacomparativesinouranalysisandpresentationofCBA’sinformation.CBA’sunderlyingcashearningsaftertaxbeforesignificantitemsareshownbeforeinvestmentearningsonshareholder’sretainedprofitsandcapitalinlifebusiness–Jun10$178millionandJun09($193)million.
(v) NABunderlyingcashearningsaftertaxbeforesignificantitemsareshownbeforedistributionstoholdersofNationalSecuritiesandinvestmentearningsonshareholder’sretainedprofitsandcapitalinlifebusiness–Sep10($154)millionandSep09($219)million.
(vi) WBCacquiredStGeorgeBankon1December2008.WBChasprovidedcomparativeinformationfor2009reflectingtheresultsofSGBasthoughithadbeenacquiredon1October2008(proformainformation).WhereverpossiblewehaveusedtheproformacomparativesinouranalysisandpresentationofWBC’sinformation.
ANZ(iii) CBA (iv) NAB (v) WBC (vi)
12mthsSep-10
12mthsSep-09
12mthsSep08
12mthsJun10
12mthsJun-09
12mthsJun-08
12mthsSep-10
12mthsSep-09
12mthsSep08
12mthsSep-10
12mthsSep-09
12mthsSep08
Balancesheet
Totalassets 531,739 476,987 470,293 646,330 620,372 487,572 685,952 654,120 656,799 618,277 589,587 587,114
Riskweightedassets 264,242 252,069 275,434 290,821 288,836 205,501 344,658 342,522 343,511 279,379 288,739 195,505
Grossloansandacceptances 367,506 352,107 355,347 512,838 488,500 383,502 447,981 436,570 438,303 482,366 467,843 435,875
Assetquality&provisioning
Grossimpairedassets 6,561 5,595 2,673 5,216 4,210 683 6,048 5,500 2,149 4,585 3,770 1,407
Netimpairedassets 4,686 4,069 1,998 3,224 2,481 404 4,524 3,949 1,504 2,963 2,542 806
Grossimpairedassetsasa%ofloansandacceptances
1.79% 1.59% 0.75% 1.02% 0.86% 0.18% 1.35% 1.26% 0.49% 0.97% 0.81% 0.32%
Individuallyassessedprovisions 1,875 1,526 675 1,992 1,729 279 1,524 1,551 645 1,622 1,228 458
Individuallyassessedprovisions%ofimpairedassets
28.6% 27.3% 25.3% 38.2% 41.1% 40.8% 25.2% 28.2% 30.0% 34.8% 32.6% 32.6%
Collectiveprovisions 3,153 3,000 2,821 3,461 3,225 1,466 3,221 3,195 2,539 3,439 3,506 2,131
Collectiveprovisions%ofnonhousingloans&acceptances
1.91% 1.83% 1.57% 1.83% 1.64% 0.87% 1.44% 1.37% 1.06% 2.05% 1.92% 1.13%
Totalprovisions 5,028 4,526 3,496 5,453 4,954 1,745 4,745 4,746 3,184 5,061 4,734 2,589
%ofloans&acceptances 1.37% 1.29% 0.98% 1.06% 1.01% 0.46% 1.06% 1.09% 0.73% 1.05% 1.01% 0.59%
Profit&lossanalysis(i)
Netinterestincome 11,051 10,312 7,855 11,868 10,716 7,907 12,288 12,072 11,142 11,855 11,789 9,652
Otheroperatingincome 5,171 5,216 4,440 6,955 7,013 6,451 5,874 5,778 5,210 5,055 5,034 5,206
Totaloperatingexpenses 7,298 6,948 5,406 8,601 8,222 7,021 9,386 8,524 8,214 6,972 6,740 6,440
Coreearnings 8,924 8,580 6,889 10,222 9,507 7,337 8,776 9,326 8,138 9,938 10,083 8,418
Baddebtexpense 1,875 3,128 2,090 2,075 3,392 930 2,263 3,815 2,489 1,456 3,292 1,205
Profitbeforetax 7,049 5,452 4,799 8,147 6,115 6,407 6,513 5,511 5,649 8,482 6,791 7,213
Incometaxexpense 1,977 1,536 1,365 2,208 1,584 1,630 1,777 1,451 1,408 2,537 2,025 2,061
Minorityinterest 6 2 8 16 30 31 1 0 (1) 66 71 74
Cashearningsaftertaxbeforesignificantitems(underlyingprofit)
5,066 3,914 3,426 5,923 4,501 4,746 4,735 4,060 4,242 5,879 4,675 5,078
Statutoryresults(ii) 4,501 2,943 3,319 5,664 4,723 4,791 4,224 2,589 4,536 6,346 3,446 3,859
Keydata
Otheroperatingincome(%oftotalincome) 31.9% 33.6% 36.1% 36.9% 39.6% 44.9% 32.3% 32.4% 31.9% 29.9% 29.9% 35.0%
Interestspread 2.21% 2.00% 1.59% 1.91% 1.81% 1.68% 1.93% 1.94% 1.69% 1.94% 2.12% 1.71%
Interestmargin 2.47% 2.31% 2.01% 2.13% 2.08% 2.02% 2.24% 2.16% 2.19% 2.22% 2.33% 2.02%
Expense/incomeratio(headlinereportedratio)
45.0% 44.8% 44.0% 45.7% 46.4% 48.9% 45.9% 43.9% 46.9% 41.2% 40.1% 43.3%
Totalnumberoffulltimeequivalentstaff 46,917 37,687 36,925 45,025 44,218 39,621 44,551 38,953 39,729 38,479 36,199 36,690
Operatingcostsperemployee(dollars) 155,551 161,010 146,405 191,027 185,942 177,204 210,680 218,828 206,751 181,190 186,193 175,525
Returnonaverageequity%(asreported) 15.5% 13.3% 15.1% 18.2% 15.6% 20.4% 13.2% 11.8% 14.3% 16.1% 14.0% 23.1%
Capitalratios
Tier1 10.1% 10.6% 7.70% 9.2% 8.1% 8.2% 8.9% 9.0% 7.4% 9.1% 8.1% 7.8%
Tier2(netofdeductions) 1.8% 3.1% 3.40% 2.3% 2.4% 3.4% 2.5% 2.5% 3.6% 1.9% 2.7% 3.0%
Total 11.9% 13.7% 11.1% 11.5% 10.4% 11.6% 11.4% 11.5% 10.9% 11.0% 10.8% 10.8%
pwc.com.au/mba
National
Hugh Harley [email protected]
Sydney
Michael Codling [email protected]
Melbourne
Mark [email protected]
Brisbane
Sandra [email protected]
Adelaide
Perth
Justin [email protected]
New Zealand
Paul [email protected]
For further information or copies of this report, please contact
Michelle Oliver+61(2)[email protected]/mba
Note:thePwCBankingGaugeisaconsensusviewacrossthefourbanksandacrossfiveofAustralia’sleadingbankinganalysts–CraigTurton(Macquarie),JamesEllis(CreditSuisse),JonathanMott(UBS),MatthewDavison(MerrillLynch)andScottManning(JPMorgan).
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