What did we learn from the banks’ half-yearly results?

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May 07 2021
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Three of the four major banks have all announced strong half-yearly profits, although pressure for future earnings remains, a consulting firm has revealed.

Combined, the three banks’ cash earnings increased by $5.3 billion to a collective $13.8 billion or an increase of 62 per cent.

“The Australian major banks’ half-year results reflect a more positive operating environment than might have been expected this time last year,” EY Oceania banking and capital markets leader Tim Drings believes the banks are still facing some pressures moving forward.

“Fears of large-scale defaults on housing and business debt have begun to ease and, while the banks still face an increase in non-performing loans as a result of the economic downturn, it appears at this stage that the rise will be more modest than anticipated.”

However, despite organic growth and reduced risk weighted assets, the banking sector is likely to face headwinds, including lower margins on loans, for the medium term.

“Despite the stronger economic outlook, though, risks remain elevated and the banks will need to ensure they stay the course while navigating an environment of ultra-low interest rates and aggressive mortgage competition,” he continued.

“The full impact of the economic downturn on asset quality is also still playing out, with forbearance programs and income support measures only recently drawing to a close.”

Flush with capital and looking to lower costs

The banks are now seeing the benefits of divestment and lower levels of debt requirements, which are seeing profits and dividends soar.

“Having shored up their balance sheets in anticipation of a wave of loan defaults, which have not yet eventuated, the banks are flush with capital,” Mr Dring said.

Underlying operating costs generally declined for most of the banks this half. There are, however, ongoing remediation programs, and the need for accelerated technology investment to enhance digital capabilities and continue to innovate for future growth and further cost reduction.

“With earnings growth and margins remaining under pressure, reducing costs and increasing productivity is an imperative for the banks and they are continuing efforts to tighten their cost bases and increase efficiencies, by focusing on simplification of their businesses and reengineering processes,” he said.

Prioritising the sustainability agenda

The COVID-19 pandemic has also reinforced a focus on sustainability as a means towards resilient recovery.

According to EY, investors and customers are increasingly using environmental, social and governance (ESG) metrics to determine a business’s value, to absorb against short-term shocks as well as create value over the longer term.

While this was already on the banks’ agendas, EY is now predicting it will move even higher up the priority list post-pandemic.

“Meeting consumer and regulatory expectations in this space will require the banks to build stronger connections between financial and non-financial performance,” Mr Dring said.

“They will need to identify not just risks, but also new opportunities presented by ESG, notably in sustainable finance. Greater consistency and transparency in reporting on how progress is being made will also be important.”

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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