Challenges, choices and complexities Australian major banks F Y2019 results November 2019 “Bankprofitabilityisunderthreat,ROEhashalved overthepast15years.NIMshavehalvedoverthat period.Wearenowmuchclosertoourcostof equity.Theabilitytoholdthemachinetogetheras itis...isunsustainable.Ithinktheideathatthese universal,mass-marketbanksaregoingtocontinue tothrive,Idon’tagreethat’sthecase.Iamnot sayingthere’sgoingtobenone,butIdon’tbelieve thatthisissustainableinthefuture.’’ Shayne Elliott CEO,ANZi Growthwasa challenge Efficiencyiscritical Cashprofitdeclinedby Total income Total expenses declined by 3.7% increased by 0.8% 7.8% Creditriskincreasing Lendinggrowthhasslowed OntracktomeetAPRA’s ‘unquestionablystrong’ (90DPD+GIA)/GLA Total average increased by interest earning CET1 14 bps assets 3.3% target of 10.5% Source:FY2019resultsandinvestorpresentationsforANZ,CBA,NABandWBC:Deloitteanalysis. Challenges, choices and complexities | Australian major banks FY2019 results Majorbanks:FY2019results AtypicalAustralianbankingreportingseasonafewyearsago Ontopofthis,bankshavehadtoimplementAPRA’sBanking wascharacterisedbyhighretailbankingReturnonEquity ExecutiveAccountabilityRegime(BEAR)effectivefrom1July2018. (ROE),positivejaws,lowerbaddebts,andabovesystem Withintensivecompetitivepressuresfrominternationalbanks mortgage growth. and non-traditionalplayers;‘zerobound’interestanddepositrates; SolidGDPgrowth,highimmigrationintake,andaresilientjob highercapitalrequirementsforNZbusinesses;continuedlarge markethaveprovidedafavourablebackdroptotheAustralian remediationprograms,andthepermanentincreaseinregulatory bankingindustryformanyyears.Butthetidehasturned. andcompliancecosts,choicesarehavingtobemade. TheFY19annualreportingseasoniihighlightedtheheadwindsof Simplicity,productivity,transparency,andvaluearethename uncertaineconomicconditionslocallyandglobally,flatteningglobal of thegame.Thegoodnewsisthatthisisnotjustbeginning. anddomesticgrowth,netinterestmargincompression,elevated This workhasbeengoingoninsomeinstancesforatleastfour remediationcosts,andaturningassetqualitycycle. years.Thebigquestioniswhichbankwillcrossthe‘perception’ finishlinefirst? TogetherwithcontinuedpressureinthewakeoftheHayneRoyal Commission,aProductivityCommissioninquiryintocompetition Soitisnotsurprisingthatthemajor’saggregateFY19cashprofit inthefinancialsystem,andtheACCC’smortgagepricinginquiry declinedby$2.3billionto$26.9billion.(downby7.8%vslastyear) overthelast18months,theoutlookforthesectoriscomplex andthebottomlineresultswereimpactedby$4billionoflarge, and challenging. notableitems. Whatthemajorscancontroliscost.AndeachCEOhasbeen Evenafterstrippingouttheseitems,underlyingcashprofitfrom activelydoingso.Whatisn’teasy,istodosowhiledeliveringtop continuingoperationsdeclinedby2.6%highlightingthechallenges flightservice,redesigningprocesses,andinvestingincompliance facingthebanks. andtechnology. ThecashROEsofthemajorshavedeclinedsignificantlyandare nowapproachingtheircostofcapital. Aggregate cash profit of major banks – FY2019 32000 31000 30000 2,118 2,674 29000 499 271 28000 1,053 27000 383 17 1,278 62 214 91 52 26000 717 351 1,103 25000 29,169 26,908 24000 23000 22000 I s e NC Other OOI Occupancy/ Wealth, fund Trading income Other Expenses Premises Expenses Technology Expenses NPAT September 2019 NPAT September 2018 Credit Impairment charge Management & Insuranc Net Interest Income - Rate Fee & commission income Personnel Expenses - Rate Income Tax - change in rate Income Tax - change in profit Net Interest Income - Volume Personnel Expenses - Volume Source:FY2019ResultsandInvestorPresentationsforANZ,CBA,NABandFallWBC;Deloitteanalysis. Rise 1 Challenges, choices and complexities | Australian major banks FY2019 results Managingthechallenges, choicesandcomplexities Australian banks are facing unprecedented challenges forcing choices to cut through the complexity. Lower for longer interest rates Underlying economic conditions n Australia an loball rates are no lose to ero it titenin reit onitions lo routiit an eakenin suressin te s an s an otentiall uellin asset consumer and business confidence, Australia is experiencing bubbles and impacting the stability and profitability of the loss in economic momentum. The banking sector mirrors the financial system. The sector should prepare itself for a ‘zero state of the economy and is facing an extended period of low rate orl araterise b elusie reenue rot elinin credit growth. profit margins resulting in significant implications for Australian households and businesses. Intensive regulatory scrutiny and intervention Non Financial Risks ntense reulator an olitial srutin is likel to be Broader societal and community expectations are demanding the ‘new normal’ for the Australian banking sector in the significant leadership attention and resources. Organisational foreseeable future. Proactive enforcement regime of the ulture trust airness an aountabilit ae beome art embolene reulators is likel to iner te roess o of the national conversation. rebuilding trust with the community and customers. Rising Shareholder activism Permanent increase in cost of doing business Boards and ELTs are under increasing shareholder pressure over ier aital reuirements eleate risk omliane osts strategic direction, remuneration, culture and governance issues. an risin remeiation osts ae inrease te ost o oin Given the growing trust deficit, Boards will find it challenging business for the majors. The gap between ROE and Cost of Equity to balance the interests of employees, ELT, shareholders, has substantially reduced over the last 5 years. Given the world customers and the wider community. o isrution is eolin rail te majors oul nee to make substantial inestment in tenolo to sta aea of the disrupters. Changing competitive dynamics The majors are facing intensive competitive pressure from international banks an nontraitional laers in business lending, residential lending and the payments space. Open banking reime oul substantiall imat banks rimar relationsi it their customers. 2 Challenges, choices and complexities | Australian major banks FY2019 results What is profit? StatutoryProfit.CashProfit.CashProfitfromContinuingOperations.UnderlyingProfit.Thebanksreportanumberofdifferent profitresults. ANZ CBA NAB WBC Total $bn $bn $bn $bn $bn Statutory Net Profit after Tax 5.95 8.57 4.80 6.78 26.11 Statutory Net Profit after Tax 6.30 8.36 5.09 6.78 26.53 from continuing operations Cash Net Profit after Tax from 6.47 8.49 5.10 6.85 26.91 continuing operations Cash Net Profit after Tax from continuing operations 6.77 9.62 6.55 7.98 30.91 excluding ‘one-offs’ and notable items (estimate) Source:2019FullYearResultsandInvestorPresentationsforANZ,CBA,NABandWBC;Deloitteanalysis. 3 Challenges, choices and complexities | Australian major banks FY2019 results Growth FY19 has been a challenging year for the majors, with NIM declining and growth slowing. Fee income has also taken a hit. ROE’s are now approaching the cost of equity. Remediation and restructuring provisions continue to weigh on bank results and may do so for some time to come. Banks are focusing on efficiency and productivity savings to offset this, which is no mean feat given the need to serve customers well and improve in the areas of risk and compliance. At the same time banks need to invest in the future with new players providing fierce competition. Major Banks: FY2019 results KPI Cash Profit from continuing operations 5.1 6.5 6.8 8.5 (AUD Billions) -10.6% -15.1% -4.7% Cash ROE % 9.90 10.75 10.90 12.50 Growth -180bps -225bps -10bps -110bps NIM % 1.75 1.78 2.10 2.12 -12bps -7bps -5bps -10bps 4.4% 3.1% 5.0% 1.2% Average Interest Earning Assets (AUD Billions) 759 799 813 864 Banks’comparativepositioninghere230isbpsbasedonapproximation. 481bps 210bps CashProfitandOperatingCostshasbeenstatedonacontinuingoperationsbasisincludinglargenotableitems Cost to IncomeIndicates ratio % increase/decrease52.3innumberswithrespecttothepreviouscorrespondingperiodand48.6otherwiseforthe47 .7 46.2 ‘Efficiency’and‘Qualityandrisk’sections.Noarrowindicatesnochangefromthepreviouscorrespondingperiod. 1.1% 3.3% -80bps Efficiency Source: FY2019resultsandinvestorpresentationsforANZ,CBA,NABandWBC:DeloitteAnalysis. FTEs (spot) 42,921 37,588 34,370 33,288 2.5% 3.4% Cash profit and total operating income ANZ’scashprofitfrom-0.7%continuingoperationswas$6.47bn-5.0% (flatvslastyear)despiteadeclineintotaloperatingincomeof CBArecordedOperatingafallof4.7% Costsin itscashprofitforFY19asaresult (AUD Billions) 2%.ANZ’snetinterestincomedeclinedby1%despitegrowth ofhigheroperatingexpenses,(up2.5%vs112018),.3 whichincluded 10.0 9.1 9.0 ininterestearningassetsof5%.NIMdeclinedby11bps.Other higherremediationcharges,increasedinvestmentinriskand operatingincomedeclinedby$163m(3%)because-3.5%oftheimpact complianceandfeeremovals.Toplineincomefellby2%(vs2018) ofnetdivestments,reductioninfeeandcommissionincome asaresultoffeechangestobenefitcustomers($275minFY19 30bps andreductioninincomefromthelenders4bpsmortgage22bpsinsurance19bps andexpectedCollectivetobe~$415m ProvisioninFY20)andreducedinterestincome /CRWA % business.Thedeclinewaspartiallyoffsetbyimprovementsin (drivenbydeclineinFY19NIMby5bps). 1.05 marketsincome. 0.96 0.95 0.94 CBA’shomeandbusinesslendinggrewby4%.Itshomeloan NAB’s cashearningsfromcontinuingoperationsdeclinedby volumesgrewfasterthansystemgrowth,whichwasoffsetby 6.7% 6.7% 10.6%compared0.8% toFY2018asaresultof4.2%declineintotal a reductionininstitutional lending(down12%vs2018). Total RWA income.NAB’stotaloperatingincomedeclinedbecauseofhigher OtherQualitybanking