Big four lenders in search for revenue strategy
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.”