Majors work towards simpler bank model as profits take a hit

Additional remediation, legal and compliance costs have taken a toll on banks' profit margins

Majors work towards simpler bank model as profits take a hit

Together the major banks reported cash profits after tax of $29.5bn for the full year, which is a drop of 5.5% compared to 2017, according to KPMG’s Major Australian Banks Full Year Analysis Report 2017-2018. The fall comes as banks attempt to “restructure and simplify their business models in order to regain trust and position for a more challenging operating environment”.

According to the report, as banks work to win back stakeholders’ trust, they have to confront slowing revenue growth, rising capital levels, and growing legal and remediation costs.

“In the face of a number of structural factors impacting the banking industry simultaneously, the majors are executing against their restructuring and simplifications programs in order to reposition their business models for the future,” KPMG Australia’s head of banking Ian Pollari said in a statement.

“They are adapting their business mix, product portfolios and distribution strategies in response to the evolving operating and regulatory environment.”

The report revealed that banks need to balance remediation, legal and regulatory spending with continued investment in technological innovation in the face of growing threats made by new players. This is particularly relevant as changes to the ADI licensing regime and Open Banking intend to stimulate greater market competition.

“Not only have the various compliance and remediation costs translated into higher cost-to-income ratios, the majors’ investment spend in risk and compliance projects is also up strongly and in most cases investments on growth initiatives has decreased in a relative sense,” KPMG partner, banking strategy, Hessel Verbeek said.

“If this redirection of investment towards regulatory compliance continues over a protracted period of time and the majors are unable to maintain their historical levels of investment in digital and other competitive initiatives, it could impact on the level of innovation that Australian consumers and businesses are accustomed to from our banking industry. Trade-offs will inevitably need to be made," he added. 

According to the report, the major banks’ average net interest margin of 200 basis points (cash basis), down by 1 basis point compared to last year, is primarily due to mortgage and deposit re-pricing to offset lower earnings on capital, the market’s income, and the effect of the Major Bank Levy.  

The report also showed that housing credit grew by 3.3% in the full year compared to non-housing credit that grew by only 2.9%.