Indicating a healthy outlook for Australia’s network of major banks, a new analysis from professional services network KPMG revealed big banks raked in a combined after-tax cash profit from continuing operations of $14.4 billion in the first half of 2022.

This translates into a 5.1 per cent increase against the comparable period in 2021, indicating that bank profits are returning to their pre-COVID levels despite remaining “slightly” down, by 0.4 per cent, on the results clocked in the first half of the 2019 financial year.

According to the KPMG report, the growth in cash profits hinged on the increase in total operating income (on a cash basis), which edged up 0.8 per cent on the year, rising from $39.6 billion to $39.9 billion.

“Off the back of this earnings growth, the Majors’ return on equity (ROE) has risen to 10.6 per cent from 10.4 per cent in FY21,” the report found.

Continuously strong volumes in both mortgage and business lending contributed to a lift in operating incomes, KPMG explained.

The firm’s head of banking and capital markets, Steve Jackson, said the major banks have successfully capitalised on the recovery of the Australian economy and the strong housing market performance to deliver improved financial results.

“With returns on equity in the sector now again restored to double digits but with uncertainty ahead, it will be interesting to see how they maintain their current momentum,” Mr Jackson said.

But despite the apparent resilience in banking profits, KPMG pointed to a decrease in net interest margins with the average NIM for the major banks down 13 basis points to 175.

“The industry-wide depressed NIMs have been the primary brake on the majors’ profit growth,” the KPMG report said.

KPMG’s banking strategy lead Hessel Verbeek said 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 fixed rate mortgages.

“This downward pressure has only partially been offset by lower funding costs from near-zero deposit rates. The impacts of an extended period of low interest rates are deeply baked into net interest margins,” Mr Verbeek said.

Moving forward, the RBA’s recent rate rise has signalled the end of the prolonged period of ultra-low interest rates, creating a general expectation that this will support a recovery of NIMs.

“We expect to see the dual impacts of both net interest margin relief and higher levels of mortgage book stress, as RBA interest rates are expected to increase several times. However, these impacts will take their time to pull through as both margins and book quality have built up their momentum over a long period of low rates,” said Verbeek.

Another interesting development highlighted by KPMG when looking at the major’s results has been the decrease in balance sheet strength, with the average CET1 ratio declining by 90 basis points to a still very strong 11.8 per cent.

KPMG noted that while in recent years, the majors have been shoring up their capital position through divestments and lower dividend pay-out ratios, this trend appears to have ended.

“We may have reached an inflection point on balance sheet strength. This signals that the Majors have left the recent disruptions behind them, and are now charting a new course. They are starting to ‘draw down’ on the balance sheet ‘deposits’ they have been making since 2020,” said KPMG banking partner Maria Trinci.