Australia’s big banks have had a tough year compared to the banking sector as a whole, with a significant drop in cash profits and declining mortgage market share, according to a new report from KPMG. The firm attributes the declines to a combination of regulatory and international pressure.
The big four banks – Commonwealth Bank of Australia (CBA), Westpac Banking Corporation (WBC), Australia & New Zealand Banking Group (ANZ) and National Australia Bank (NAB) – dominate the country’s banking sector and attract the lion’s share of clients and revenue.
The banks, known as the Big Four, are so large and important to the economy that they consistently rank among Australia’s most valuable brands. However, like the banking sector around the world, these banks have recently come under pressure from multiple directions, including regulators, society and rivals such as BigTechs and FinTechs.
The continued growth of what KPMG calls “regulatory and compliance burdens” is one factor driving up banks’ costs. Areas of regulatory pressure include tightening data management standards worldwide, know-your-customer rules and anti-money laundering and responsible lending, among others.
Disruption in the growing financial technology (FinTech) market is also having a strong impact on large banks, forcing them to increase investment in technology to deal with competition from smaller, more technologically savvy and agile players.
According to the KPMG assessment, the financial results of the Big Four fell in a number of key areas. For example, operating income fell nearly 4% last year to $81.3 billion, while after-tax cash profit fell even more by nearly 8%. Still, the banks remained (highly?) profitable, with the Big Four’s profits just under $27 billion.
In the mortgage environment, there is increased competition from new entities in the credit segment – insurance companies, pension funds and alternative credit providers. While mortgage income at the major banks grew by 1.8% over the past year, the overall mortgage market grew by 3.1%, representing a decline in mortgage market share for the major banks.
Profit squeezes and rising costs have put the big banks into damage control mode. “Large companies continue to focus on costs, simplify their business models and invest in process and productivity improvements,” the report said.
A big part of this streamlining process was downsizing. Earlier this year, there were reports that CBA was looking to cut up to 10,000 jobs and cost around $2 billion. Global management consultancy McKinsey & Company has been drafted in to support this process. Similarly, ANZ, NAB and Westpac are in the process of implementing major cost-cutting programs across their ranks.
As large banks struggle to deal with a range of challenges, they are turning to the professional services industry for support. Over the past decade, Australia’s major banks have paid more than $1 billion in fees to the Big Four accountancy and consulting firms – Deloitte, EY, KPMG and PwC – for various projects.
This trend is likely to continue as the big banks continue to experience challenging times. Hessel Verbeek, KPMG’s banking strategy partner, said: “Profits are down significantly due to shrinking margins in a low interest rate environment and higher costs, including refunds to customers, as a result of the Royal Commission.”
The “Royal Commission” Verbeek refers to is the 2017 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which uncovered a number of cases of misconduct in Australia’s banking sector that resulted in several fines and payouts.
KPMG further recommends focusing on customer service and experience to maintain a competitive edge in a market that is increasingly digital and unified. Today’s customer prefers convenience, efficiency and transparency, which banks must work to ensure.