Turbulent start to the year hits big banks’ profits

The 2019 half year results’ announcements of Australia’s major banks reflect a turbulent start to the year, with slowing revenue, higher remediation costs, a flagging economy and the delivery of the Financial Services Royal Commission’s outcomes all taking a substantial toll on the sector.

EY analysis of the big four banks’ half year results shows combined statutory profits decreased to $13.9 billion, down 11.8% from the same period last year.

EY Oceania Banking and Capital Markets Leader, Tim Dring said: “The growth outlook for the Australia’s major banks looks increasingly uncertain, with profits down, remediation costs up and margins under significant pressure.”

“The Financial Services Royal Commission has disrupted the banks’ risk appetites and business flow, propelling them to reshape their processes, simplify products and address compliance obligations, as they prepare for more intensive levels of regulatory supervision and enforcement from APRA and ASIC. It has also revealed issues in their back books,” Mr Dring said.

“While most of the major banks’ cash earnings were up from the 2018 half year, this doesn’t take into account the significant impact that growing remediation costs are having to overall profits. In the last 18 months, total remediation costs across the big four have reached $4.8 billion – with $1.9 billion set aside for remediation in their 2019 half year results alone.”

“So far, remediation costs have related mostly to misconduct issues within wealth management divisions. But, on-going investigation into product design and compliance will likely see further increases in the banks’ remediation burden that will put cost-to-income ratios under increasing pressure,” Mr Dring said.

“Adding to this pressure, the major banks are facing a stricter executive pay framework (BEAR) and more onerous regulatory regime at the same time as the market is opening up to increased competition from non-banks and foreign banks.”