Big four lenders in search for rev­enue strat­egy

The Weekend Australian - - BUSINESS - JOYCE MOULLAKIS SA­MAN­THA BAI­LEY

Sim­pli­fi­ca­tion may be help­ing the big four banks nav­i­gate the Hayne royal com­mis­sion mael­strom, but an­a­lysts are stay­ing alert to any growth and cost levers af­ter the sec­tor’s earn­ings-per-share fell to lev­els not seen since 2012.

With earn­ings growth un­der pres­sure, the banks have used their 2018 re­sults, or in the case of Com­mon­wealth Bank a quar­terly up­date, to high­light cost cut­ting, the stream­lin­ing of pro­cesses and bet­ter use of tech­nol­ogy. But the key ques­tion an­a­lysts pose is: what will un­der­pin rev­enue over com­ing years as mort­gage growth among the big banks con­tin­ues to slow?

“The bank­ing sec­tor de­liv­ered neg­a­tive 7 per cent earn­ing growth in 2018, tak­ing sec­tor EPS back to 2012 lev­els,” UBS bank­ing an­a­lyst Jonathan Mott said.

“This comes de­spite the low­est credit im­pair­ment charges since the banks be­gan re­port­ing as­set qual­ity in 1980. The bank­ing sec­tor is fac­ing a pe­riod of sub­stan­tial and sus­tained earn­ings pres­sure which is likely to last sev­eral years.”

On EY Aus­tralia’s num­bers, 2018 prof­its for the big four banks dropped 5.5 to $29.5 bil­lion, com­pared to the prior year. It marked the worst com­bined re­sult since 2014, when the to­tal was $28.6bn.

West­pac rounded out the profit re­sults on No­vem­ber 5 for the Septem­ber 30 year-end banks, in­clud­ing NAB and ANZ, while CBA has a June 30 bal­ance date. The re­sults were marred by re­me­di­a­tion and other re­struc­tur­ing charges as banks shed as­sets and paid back cus­tomers for wrong­do­ing un­cov­ered in the royal com­mis­sion.

That comes against the back­drop of a tem­per­ing mort­gage mar­ket. Mor­gan Stan­ley an­a­lysts ex­pect com­bined hous­ing loan growth for the big four banks will slow to about 2 per cent in 2019, from about 4 per cent. Busi­ness lend­ing will be a harder-fought bat­tle­ground.

Costs re­lat­ing to the royal com­mis­sion are be­ing fac­tored in by an­a­lysts for an­other few years at least, given the banks also ad­mit­ted there was likely more to come.

Com­mis­sioner Ken Hayne’s fi­nal re­port is due by Fe­bru­ary 1.

Cit­i­group an­a­lysts are of the view that cost man­age­ment will be a key dif­fer­en­tia­tor be­tween the four ma­jor banks, while rev­enue is ex­pected to re­main sub­dued for the fore­see­able fu­ture. They said bank earn­ings are start­ing to look more like util­i­ties, re­flect­ing slow growth and strong prof­itabil­ity.

“The ma­jor banks are set to dif- fer­en­ti­ate their earn­ings tra­jec­tory through a sharper fo­cus on costs,” the an­a­lysts said.

Cit­i­group ex­pects NAB will gen­er­ate the strong­est core profit growth in the year end­ing Septem­ber 30, 2019, as it ex­e­cutes its re­struc­tur­ing pro­gram.

The an­a­lysts said ANZ was com­ing to­wards the end of its costs over­haul pro­gram which would buoy 2019, al­though ben­e­fits there­after would likely slow.

Mac­quarie an­a­lysts said pro­posed changes by the pru­den­tial reg­u­la­tor to boost ma­jor bank cap­i­tal stores from 2023 were likely to see a re­turn dif­fer­en­tial be­tween the re­gional and big banks nar­row.

“The ex­tent to which the ma­jors can re­coup higher fund­ing costs by pass­ing it on to cus­tomers in the cur­rent en­vi­ron­ment re­mains ques­tion­able,” they said.

“Ul­ti­mately, we see the re­gional banks as the rel­a­tive ben­e­fi­cia­ries from this an­nounce­ment and across the ma­jors, and CBA/ West­pac will be less im­pacted than ANZ/NAB.”

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