With Australia’s banks delivering a solid set of financial results, analysis from one of the world’s largest accounting firms showcases a challenging environment for both major and non-major lenders.
Banks have become increasingly adept at navigating the current economic conditions, according to Tim Dring, Oceania banking and capital markets leaders for EY.
“The balancing act of margin versus volume is a game the banks have become well-versed in as low interest rates, intense competition, funding cost pressures and moderating credit growth, particularly in their business books, all combine to constrain growth.”
However, he warned that heightened economic uncertainty is currently being fuelled by high levels of household debt, low wage growth and a housing affordability crisis in Sydney and Melbourne.
“All these factors are combining to create a particularly challenging operating environment for the banks. As lower growth becomes the ‘new normal’, banks need to manage the inherent tension in two very different agendas: the need to improve financial performance versus the need to keep the bank safe.”
While banks continue to focus on driving growth through their retail operations, Dring said they would adopt a more cautious approach when building their mortgage books thanks to higher levels of scrutiny, tighter lending criteria and increased risk.
“While rate increases benefit the banks’ earnings and margins, they also have the potential to put additional pressure on an already highly-indebted household sector.
“Looking ahead, the banks’ ability to extract additional margin through differential rate repricing on residential property lending will become even more of a balancing act. We are seeing mounting regulatory, government and public pressure to curtail housing price growth, particularly in the Sydney and Melbourne markets, and this is likely to continue to build.”
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