Australian banks' earnings to remain under pressure in FY2020

No thanks to growing customer remediation costs.

Earnings and profitability of Australia’s four major banks will remain under pressure for the current financial year given low interest rates and further customer remediation costs, according to Fitch Ratings.

All of the major banks—Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank Limited (NAB), and Westpac Banking Corporation (WBC)—announced further customer remediation costs in their results for FY2019, which was one of the key drivers of lower profitability. The banks reported an aggregated statutory profit of $17.85b (A$26b), down 12% from FY2018.

Further, the banks are likely to incur additional costs in the next 12 months as they continue to work through their respective remediation programmes.

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Net interest margins also continued to weaken over FY2019 due to falling interest rates, intense competition in residential mortgages and slow system credit growth. This trend is expected to continue in FY2020 as the banks are yet to feel the impact of recent interest rate cuts. Fitch Ratings noted that there could even be further easing in monetary policy.

Risks of further costs from penalties and fines or class action lawsuits also remains high for the four banks.

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The banks’ investments in digital capabilities, simplification and regulatory compliance will also continue to put pressure in the short term, but is expected to provide long-term benefits.

Similarly, the recent recovery in the housing market, which has resulted in higher application flows, could offset some of the headwinds as it may support loan growth. Banks are also turning to more stringent cost management and business simplification programmes, noted Fitch. Despite these, overall system growth will remain subdued.

The four banks as a whole reported a modest increase in impaired loans and delinquencies by the end of FY2019, reflecting some pressure on households from a period of weak wage growth and high indebtedness. Fitch believes this trend will continue, although asset quality should remain sound in the global context, supported by tighter underwriting in recent years and low interest rates.