Bank profits close to pre-Covid levels but analysts remain wary
STRONG volumes in mortgage and business lending helped the major banks return first-half profits to near preCovid levels, but analysts warn “the only real certainty is uncertainty’’ going forward.
KPMG’s analysis of the results of the big-four banks shows they reported a cash profit after tax from continuing operations of $14.4bn, up 5.1 per cent on the previous corresponding period.
This is just 0.4 per cent below the result from three years ago, before the pandemic hit, with the underlying drivers of the strong result being “continued strong volumes in both mortgage and business lending”. The value of mortgage loans was up 2.5 per cent over the most recent half to $1812bn while business lending grew 4.8 per cent to $1077bn KPMG said.
KPMG Australia’s head of banking Steve Jackson said the banks had managed to restore their return on equity to the double digits, but “with uncertainty ahead, it will be interesting to see how they maintain their current momentum’’.
Both KPMG and EY note that the banks have little room to move on further cost-cutting, while the continued low interest rate environment has kept the pressure on net interest margins (NIM). “For the majors, the average NIM dropped to 175 basis points, down 13 basis points from FY21,’’ KPMG says. “The industry-wide depressed NIMs have been the primary brake on the majors’ profit growth.’’
KPMG banking strategy lead Hessel Verbeek said the impact of the extended period of low interest rates was “deeply baked into net interest margins’’.
“The market dynamic has been dominated by the NIM decrease resulting from low lending rates in a very competitive market and strong demand for low-margin, fixedrate mortgages,’’ Mr Verbeek said. “This downward pressure has only partially been offset by lower funding costs from near-zero deposit rates.’’
EY region banking and capital markets leader Tim Dring said the margin headwinds looked set to continue into the second half of the year, although the outlook was somewhat brighter because of the recent cash rate rise.
“While margin compression is likely to continue in the short term, the rising interest rate cycle should ease NIM pressures and lead to improved profitability for the banks over the medium term,’’ he said. “However, ongoing economic risks point to continued uncertainty for the banking sector.”