While Australia’s major banks have undoubtedly demonstrated resilience through the COVID-19 pandemic to date, several key areas of risk have become clear for the year ahead, according to KPMG’s Major Australian Banks Full Year Analysis Report 2020.
In FY2020, the big four reported a combined cash profit after tax from continuing operations of $17.4bn, down 36.6% on FY2019; however, even with having significantly increased their loan loss provisions and allowing customers to defer loan repayments, the groups' actual loss experience has been minimal thus far and will instead be evidenced in 2021, as the government unwinds its economic support measures.
Also over the year, interest margins continued their downward trajectory, costs remained high and significant extraordinary items such as customer remediation and regulatory charges dragged on the banks' results in addition to the impacts of the spreading virus.
“Despite the substantial challenges, the majors have proven resilient in the last year and through the strength of their balance sheets, played a critical role as shock absorbers for the economic downturn,” said Ian Pollari, KPMG Australia’s head of banking.
“They have a big job ahead of them to play their role in Australia’s recovery and improve their financial performance, while progressing with a number of large and complex remediation, regulatory change and technology programs," he added.
“The cost transformation challenge for the majors requires them to accelerate the digitisation and automation of end-to-end processes, notwithstanding the persistently high levels of risk and compliance spend."
Yet despite this cost, the report emphasised the importance of the majors investing in the digitisation of their operations, particularly as they face competition from “focused challengers” in payments, mortgages, consumer credit and business lending – many of whom offer digital channels and products, supported by efficient processes.
According to Hessel Verbeek, KPMG’s banking strategy lead, the majors are increasingly turning to fintech partnerships to digitise processes, launch new products and build new business models, employing a “leapfrog approach” which can help them overcome some of the transformation challenges posed by their legacy systems and environments.
Moving into FY2021, the report highlighted important indicators to watch, including loan loss performance as government support unwinds, credit growth – especially in mortgages and business lending – and the rate of interest margin decline and cost-income ratios.
Into the next year, the big four will need to continue balancing operational resilience, shareholder dividends, the required investment in growth and cost transformation; those that quickly transition to more efficient operating models are likely to be rewarded, KPMG predicts.
