Australia's Major Banks Take Financial Hit As Market IntensifiesNovember 21 2019
Australia’s major banks have had a tough year relative to the overall banking sector, with a substantial decline in cash profits and a falling share of the mortgage market, according to a new KPMG report. The firm attributes the declines to a combination of regulatory and international pressure.
The four major banks – Commonwealth Bank of Australia (CBA), Westpac Banking Corporation (WBC), Australia & New Zealand Banking Group (ANZ) and National Australia Bank (NAB) – dominate the country’s banking sector, drawing the lion’s share of clients and revenues.
Known as the Big Four, the banks are so large and important to the economy that they consistently rank are among Australia’s most valuable brands. However, much like the banking sector across the globe, these banks have come under pressure from various directions recently, including regulators, society, and rivals such as BigTechs and FinTechs.
The continued growth of what KPMG terms the ‘regulatory and compliance burden’ is one factor driving up costs for banks. Areas of regulatory pressure include a tightening of data management standards across the globe, rules for know your customer and anti-money laundering, and responsible lending, among others.
Disruption from a growing financial technology (FinTech) market is also having a strong impact on major banks, forcing them to ramp up their investment in technology to tackle competition from smaller, more tech-savvy and agile players.
According to KPMG’s review, the financials of the Big Four have declined in a number of key areas. Operating income for instance fell by nearly 4% last year to reach a value of $81.3 billion, while cash profit after tax registered an even more severe decline of nearly 8%. Yet, the banks remained (highly?) profitable, with profits for the Big Four standing at just under $27 billion.
Increased competition from new entrants in the lending segment – insurance companies, pension funds and alternative lenders – is manifesting itself in the mortgage landscape. While mortgage incomes for major banks grew by 1.8% over the last year, the overall mortgage market grew by 3.1%, representing a fall in the mortgage market share for major banks.
The profit squeeze and rising costs have driven major banks into damage control mode. “The majors continue to have a focus on costs, simplifying their business models and investing in process and productivity improvements,” states the report.
A big part of this simplification process has been staff cuts. Reports emerged earlier this year that CBA was looking to cut as many as 10,000 jobs and around $2 billion in costs. Global management consultancy McKinsey & Company was drafted to support this process. Similarly, ANZ, NAB and Westpac all are in the process of rolling out major cost-cutting programmes within their ranks.
As major banks look to tackle a sea of challenges, they have been turning to the professional services industry for support. Over the last decade, Australia’s major banks have splashed more than $1 billion in fees on the Big Four accounting and advisory firms – Deloitte, EY, KPMG and PwC – for various projects.
This trend is likely to persist as major banks continue to navigate a challenging period. Hessel Verbeek, a partner in KPMG’s Strategy practice with a focus on the banking sector, said: “Profits are down significantly as a result of shrinking margins in a low interest rate environment and higher costs, including refunds to customers, in the aftermath of the Royal Commission.”
The “Royal Commission” Verbeek refers to is the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry of 2017, which revealed a plethora of malpractice instances in the Australian banking sector, resulting in several fines and payouts.
Going ahead, KPMG recommends a focus on customer service and experience to maintain a competitive edge in a market that is increasingly digital and uniform. The contemporary customer prioritises convenience, efficiency and transparency, which banks must work to deliver.
Consultancy. (2019, November 17). Australia's major banks take financial hit as market intensifies. Retrieved from https://www.consultancy.com.au/news/1344/australias-major-banks-take-financial-hit-as-market-intensifies