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Banking Matters
Major Banks Analysis
May 2015
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Overview
Balance Sheet
dynamics
Revenue
CASH
EARNINGS
Expenses
CORE
EARNINGS
Asset quality
ROE
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Overview
The banks delivered combined cash profits of $15.5 billion, up 10.8% for the six months to
March 2015 (hoh) and. 4.8% compared to the six months to March 2014 (pcp). However, taking
into account NAB’s large conduct provisions and software write downs in September 2014,
cash profits only grew 1.1% hoh. Bad debt expense, a previous driver of profit growth, has
passed the bottom of the trough and started to increase again, growing 8.1% hoh.
Regulatory and market pressures are pointing towards all the banks holding more capital,
systemic risks are building and digital is changing the price of everything. In setting course for
the future, banks will be thinking carefully about where to invest to generate capital growth over
the medium term, if they are to achieve their ambitious return on equity targets.
Overview
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Revenue
Balance Sheet
dynamics
Expenses
Asset quality
Bank deposits
Credit
Credit
At 6.2% per annum, lending growth is the highest
it has been since the onset of the GFC. Owner
occupied housing loans, investment housing loans
and business loans each contributed a third of new
lending over the last six months.
A highlight is the sustained growth in business
credit. Business loans grew 5.3% per annum
to March 2015, up from 3.8% per annum to
September 2014 and 2.7% per annum to March
2014. The last month of negative growth was
September 2013. This is a hopeful sign that
businesses are starting to invest and is consistent
with the pick-up in economic activity in the
non-mining states – mining investment was largely
funded from the capital markets, not the banks.
In the year to March 2015 housing credit grew 7.3%
up from 5.9% the year before. Owner occupied
housing grew 5.8% per annum, whereas investment
housing grew 10.4% per annum. The growth in
investment housing is being fuelled by very low
interest rates and is largely responsible for the
recent increases in house prices.
The banks are increasingly the main providers
of credit. Their proportion of overall lending is
now 87.1%, up from 86.5% at September 2014
and 85.5% at March 2014. Prior to the GFC it
was closer to 70%.
Domestic Credit Growth (Annual % growth – 12 month rolling average)
%
35
Balance
sheet
dynamics
30
25
20
15
10
5
0
-5
-10
2005
2006
2007
Housing – Owner-occupier
2008
2009
Housing – Investor housing
2010
Total credit
2011
Business
2012
2013
2014
2015
Overview
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Balance Sheet
dynamics
Revenue
Expenses
Credit
Asset quality
Bank deposits
Bank deposits
Bank deposits continue to grow at a consistent
pace, 7.6% per annum to March 2015, the
same as last year.
The composition of products changed in response
to the newly introduced liquidity rules. Term
deposits shrank 2.1% per annum whilst at call and
other deposits grew 14.1% per annum. Banks have
re-priced deposits favouring more stable saver
accounts, which reward customers for leaving their
funds untouched, over term deposits.
Deposits from households grew 10% per annum,
which continues to be at the top end of our
long term expectations of 7% – 10%. Business
deposits jumped ahead, growing 9.3% per annum,
significantly stronger than the 4.5% per annum
to September 2014. Superannuation fund deposits
shrank 70 bps, in stark contrast to the 16%
per annum of a year ago, reflecting investors’
preference for higher yielding investments
such as equities.
Demand for credit outstripped the supply of
deposits by over $50 billion in the year to March.
That is, $1 in every $3 of lending is being funded
from the wholesale markets. Growth in business
credit is gaining momentum, so the gap is expected
to continue to widen – unless demand from other
categories, such as investment housing loans,
decreases. The deposit to loan ratio has fallen
30bps since March 2014.
Composition of bank deposits (A$bn)
A$bn
1,500
Balance
sheet
dynamics
1,200
900
600
300
0
Mar-2005
Mar-2006
Household Deposits
Mar-2007
Mar-2008
Business Deposits
Mar-2009
Super Deposits
Mar-2010
Mar-2011
Mar-2012
Mar-2013
Mar-2014
Mar-2015
Overview
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Balance Sheet
dynamics
Expenses
Revenue
Asset quality
Other income
Net interest income
Net interest income
Net interest income, which accounts for 70% of
the banks total income, grew 2.3% hoh (4.9% pcp)
reflecting strong loan growth offset by a 3 bps
decline in net interest margins. The banks’ global
loans grew 5.3% hoh (8.0% pcp) with 55% of this
growth coming from housing.
Net interest margins continue their steady
downward trend finishing at 2.03%, down 3 bps
hoh (5 bps pcp), lower than the previous low point
of 2.05% in early 2008. Looking ahead we expect
margin pressure to continue, as competition shows
no sign of abating. A change in the global price
of money will follow through to our banks, but
local conditions will dictate how much passed
through to customers.
Contributors to the margin decline were:
• Lending – 5bps hoh, (-10 bps pcp)
competition across the board triggering bigger
and bigger discounts, particularly in housing.
• Deposits – 2bps hoh (4 bps pcp)
competition eased, as banks have stabilised their
holdings, wholesale funding remains cheap and
special offers on term deposits have been wound
back as a consequence the new liquidity rules.
• Wholesale funding – 1 bps hoh (1 bps pcp)
lower average cost of wholesale funding as
older expensive tranches of debt mature and are
replaced by cheaper new issuances.
Combined net interest margin
%
2.50
2.29
2.28
2.27
2.26
2.23
2.20
2.25
2.14
2.14
Revenue
2.14
2.09
2.13
2.08
2.06
2.05
2.03
2.00
1H08
1H09
1H10
1H11
1H12
1H13
1H14
1H15
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Overview
Balance Sheet
dynamics
Revenue
Expenses
Net interest income
Asset quality
Other income
Other income
Other income, which accounts for 30% of the
banks total income, grew 4.2% hoh (1.6% pcp).
The major components are banking fees, 45%,
trading income 16%, and wealth management
32%. Interestingly these proportions are largely
unchanged since 2008.
The outlook for banking fees is low digit growth as
regulatory changes and competition continue to
bite, and as the new digital economy gives more
away for free. The very nature of trading income
makes it volatile, with customers’ demand for risk
products reflecting the volatility in the markets.
Wealth management perhaps has the best
prospects, with growth in underlying fund balances
driven by super and insurance claims and lapse
rates stabilising. The real challenge in this sector is
how to modernise product sets to facilitate online
sales and prepare for the next wave of regulation
which is likely to emulate from the Financial
System Inquiry, whilst dealing with the current
conduct issues which are weighing heavily on the
distribution businesses.
Revenue
ANALYSIS OF OTHER
OPERATING INCOME
CHART
Overview
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Expenses
Balance Sheet
dynamics
Total expenses grew 3.1%, hoh (5.0% pcp),
once we look through NAB’s conduct provisions
and software write downs taken in 2H14.
Revenue
Expenses
Asset quality
The result of these increases was a 3.4% hoh
(3.0% pcp) increase in the banks’ wages bill.
Notwithstanding significant cost disciplines,
achieving aggregate efficiency gains appears to
be getting harder just as revenue growth is also
being challenged. The banks combined expense to
income ratio was 43.7%, the same as 1H14.
Salaries were a big driver of the overall increase in
expenses. The banks employed 1700 (1.0%) more
staff in this half and the average salary cost per
staff member increased 2.8% to $59,610 to due
inflationary impacts. Changes in staffing mix also
had an impact.
This challenge in achieving aggregate efficiency
gains may partly be indicated by the reduction in
investment spend (down 13% hoh, and 7% pcp)
as a means of cost containment. IT expenses
only grew, 2.1% hoh (6.8% pcp) reflecting higher
software amortisation and ongoing investment
in IT across all businesses. Capitalised software
balances have reached $9 billion, so the
amortisation expense will remain high for some time
to come. Occupancy costs only increased slightly
reflecting rental increases and leasing costs.
Combined expense-to-income ratio
%
48.0
47.2%
46.2%
45.7%
46.0
45.4%
44.7%
44.4%
44.4%
44.4%
44.3%
44.3%
44.0
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43.6%
43.8%
43.7%
43.7%
1H14
1H15
43.0%
42.0
1H08
1H09
1H10
1H11
1H12
1H13
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Asset
Quality
Overview
Balance Sheet
dynamics
All the indicators are that asset quality is continuing
to improve. Net impaired assets now stand at
$6.5 billion, 17% lower than at September 2014
and 34% lower than this time last year. Accounts
90 days past due showed a slight uptick – increasing
2% since September 2014, but still 5.4% less than
at March 2014. The small increase this half was
mainly seasonal.
The improving quality of the credit portfolios reflects
in part that most of the problem assets arising
around the GFC have been resolved, but also in
significant measure the current regime of record
low interest rates. Few new problem accounts are
emerging at present.
Revenue
Expenses
Asset quality
The challenge now is that the global economy
is writing an entirely fresh script as we go. We
have been struck over the past six months by the
extent to which informed market participants have
volunteered concern about emerging imbalances
and contradictions. “This time is different” is a
common refrain – but to voice caution rather than
complacency. Beyond that, most people are as
unsure about how it might play out as we are.
Impaired assets and bad debt expense
%
%
8.0
2.5
2.0
6.0
1.5
4.0
1.0
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2.0
0.5
0.0
0.0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Impaired assets/gross loans & acceptances (left axis)
Bad debt charge/gross loans & acceptances (right axis)
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Overview
Balance Sheet
dynamics
Revenue
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Key banking statistics – Half year 2015
ANZ
6 mths
Mar-15
CBA
6 mths
Sep-14
6 mths
Mar-14
6 mths
Dec-14
NAB (iii)
6 mths
Jun-14
6 mths
Dec-13
6 mths
Mar-15
6 mths
Sep-14
WBC
6 mths
Mar-14
6 mths
Mar-15
6 mths
Sep-14
6 mths
Mar-14
Contacts
Balance sheet
Total assets
860,087
772,092
737,815
850,714
791,451
782,301
958,587
883,301
846,014
795,961
770,842
729,375
Risk weighted assets
386,863
361,529
360,740
353,048
337,715
334,197
393,238
367,652
367,224
346,823
331,387
322,498
Gross loans and acceptances
561,907
525,534
513,485
627,698
608,127
591,775
573,490
545,361
534,172
608,264
583,516
568,057
Asset quality & provisioning
Gross impaired assets
2,708
2,889
3,620
3,360
3,367
3,939
2,558
4,122
5,614
2,148
2,340
Net impaired assets
1,594
1,713
2,150
2,116
2,101
2,400
1,651
2,668
3,660
1,121
1,293
1,550
Gross impaired assets as a % of gross loans and
acceptances
0.48%
0.55%
0.70%
0.54%
0.55%
0.67%
0.45%
0.76%
1.05%
0.35%
0.40%
0.51%
Individually assessed provisions
Individually assessed provisions as a % of impaired
assets
1,114
41.1%
1,176
40.7%
1,470
40.6%
1,116
33.2%
1,127
33.5%
1,416
35.9%
907
35.5%
1,454
35.3%
1,954
34.8%
806
37.5%
867
37.1%
2,893
1,139
39.4%
Collective provisions
2,914
2,757
2,843
2,763
2,779
2,870
3,189
2,471
2,739
2,699
2,614
2,652
Collective provisions as a % of non housing loans &
acceptances
1.07%
1.08%
1.14%
1.28%
1.33%
1.40%
1.31%
1.06%
1.17%
1.32%
1.33%
1.37%
Total provisions
4,028
3,933
4,313
3,879
3,906
4,286
4,096
3,925
4,693
3,505
3,481
3,791
Total provision as a % of gross loans & acceptances
0.72%
0.75%
0.84%
0.62%
0.64%
0.72%
0.71%
0.72%
0.88%
0.58%
0.60%
0.67%
Profit & loss analysis (i)
Net interest income
7,138
7,033
6,764
7,891
7,647
7,444
7,121
6,932
6,843
6,934
6,819
6,677
Other income
3,047
2,877
2,904
3,836
3,606
3,704
2,663
2,494
2,644
3,086
3,142
3,182
Operating expenses
4,593
4,474
4,286
4,914
4,748
4,751
4,460
5,724
4,456
4,254
4,181
4,065
Core earnings
5,592
Bad debt expense
510
5,436
461
5,382
528
6,813
440
6,505
496
6,397
457
5,324
455
3,702
349
5,031
528
5,766
341
5,780
309
341
5,082
4,975
4,854
6,373
6,009
5,940
4,869
3,353
4,503
5,425
5,471
5,453
1,398
1,367
1,333
1,740
1,588
1,662
1,424
1,229
1,263
1,613
1,587
1,643
Minority interest
Statutory results (ii)
8
6
6
10
9
10
16
0
0
34
28
38
3,676
3,602
3,515
4,623
4,412
4,268
3,429
2,124
3,240
3,778
3,856
3,772
3,506
3,879
3,392
4,535
4,424
4,207
3,440
2,439
2,856
3,609
3,939
3,622
29.9%
29.0%
30.0%
32.7%
32.0%
33.2%
27.2%
26.5%
27.9%
30.8%
31.5%
32.3%
Key data
Other operating income as a % of total income
Interest spread
Interest margin
Expense/income ratio (as reported ratio)
Total number of full time equivalent staff
Operating costs per employee (dollars) – annualised
Return on average equity (as reported)
Return on average assets (underlying cash)
1.82%
2.04%
45.1%
1.89%
2.12%
45.1%
1.92%
2.15%
44.3%
1.97%
2.12%
42.2%
1.97%
2.14%
42.8%
1.97%
2.14%
42.9%
1.64%
1.92%
44.5%
1.64%
1.93%
60.6%
1.65%
1.94%
45.4%
1.87%
2.05%
42.5%
1.87%
2.06%
42.0%
1.91%
2.11%
41.2%
51,243
50,328
49,850
44,520
44,329
44,007
43,264
42,853
42,719
36,559
36,373
36,494
180,878
178,642
171,928
221,229
214,997
213,586
207,312
266,313
211,015
233,313
229,514
225,548
14.7%
0.89%
15.3%
0.94%
15.5%
0.96%
18.6%
1.15%
18.8%
1.11%
18.7%
1.12%
14.7%
0.73%
9.1%
0.49%
14.6%
0.76%
15.8%
0.96%
16.4%
1.03%
02 8266 5746
[email protected]
5,794
Profit before tax
Income tax expense
Cash earnings
Hugh Harley
Partner, Asia Pacific Financial Services Leader
16.5%
Julie Coates
Partner, Australian Banking and Capital Markets Leader
1.04%
Capital ratios
Common equity
Tier 1
Tier 2 (net of deductions)
Total
8.7%
8.8%
8.3%
9.2%
9.3%
8.5%
8.9%
8.6%
8.6%
8.8%
9.0%
8.8%
10.6%
10.7%
10.3%
11.6%
11.1%
10.6%
11.1%
10.8%
10.8%
10.3%
10.6%
10.3%
2.0%
2.0%
1.8%
1.1%
0.9%
0.8%
1.7%
1.4%
1.4%
1.8%
1.7%
1.8%
12.6%
12.7%
12.1%
12.7%
12.0%
11.4%
12.8%
12.2%
12.2%
12.1%
12.3%
12.1%
Lending and funding ratios
Gross Loans & Acceptances/Total Assets
65.3%
68.1%
69.6%
73.8%
76.8%
75.6%
59.8%
61.7%
63.1%
76.4%
75.7%
77.9%
Housing Loans Gross Loans & Acceptances
51.3%
51.6%
51.6%
65.5%
65.7%
65.4%
57.6%
57.2%
56.3%
66.4%
66.4%
66.0%
Deposits (exclude CDs)/gross loans
86.0%
83.9%
82.4%
72.9%
72.1%
72.0%
72.7%
71.7%
71.3%
69.1%
70.1%
68.5%
Deposits (exclude CDs)/total liabilities
59.8%
61.0%
61.3%
57.2%
59.0%
58.0%
45.9%
46.8%
47.7%
56.4%
56.7%
57.1%
02 8266 2006
[email protected]
All figures in AUD million unless otherwise indicated
(i) In arriving at “cash earnings”, income and expenses exclude certain non cash items. Non cash items include acquisition related adjustments, impact of hedge accounting and revaluation of treasury shares and
other items reported by the banks. Some components of income and expenses have been reclassified to improve comparability between banks.
(ii) Statutory result as reported by the banks, unadjusted.
(iii) NAB’s underlying cash earnings after tax are shown before distributions to holders to National Securities – 1H15 ($ 109) million, 2H14 ($90) million and 1H14 ($90) million, NAB only reports an expense to
income ratio for its banking operations.
KEY BANKING STATISTICS
Angela Barter
Director, Banking and Capital Markets
02 8266 1996
[email protected]
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127025145
Expenses
Asset quality