Jun 22 2020
The National and Regional Commercial Banks industry in Australia has declined over the past five years, with industry revenue expected to fall at an annualised 2.2% over the five years through 2019-20, to total $147.6 billion. This trend has largely been attributed to:
- A sluggish Australian economy
- The COVID-19 pandemic
- The consistent cash rate cuts during 2015, 2016 and five consecutive cash rate reductions from July 2019
These cuts have ultimately decreased the net interest margins of industry players, limiting profitability . Although lower rates have led to an increase in the volume of borrowers, this trend has not been enough to offset the overall fall in revenue.
Major industry player Commonwealth Bank, which accounts for approximately 22.6% market share, reported a reduction in net profit after tax by an estimated 8.1% over the 2018-19 financial year. Similarly, ANZ, which is expected to account for 15% market share in the industry, reported a fall in net profit after tax of roughly 7%.
Following the Financial Services Royal Commission and an increased level of scrutiny from APRA, industry operators are facing larger capital adequacy requirements and significant customer remediation costs. In December 2019, APRA launched an investigation against Westpac for the alleged breach of anti-money laundering laws, and imposed an additional $500 million in capital requirements needed to be held, on top of the regulatory requirements introduced in July 2019.
In previous years, the RBA’s decision to cut cash rates was attributed to a sluggish Australian economy. However, these rates recently have stayed low due to the extreme impact of the COVID-19 outbreak. As the national unemployment rate is forecast to rise by 8.83% in 2020-21 due to the pandemic, industry operators are likely to incur greater credit losses and bad debts over the period as households and businesses encounter financial difficulty.
Another aspect that significantly impacts the industry’s performance is total capital expenditure – the financing of business operations. Businesses in Australia fund their operations using debt, subsequently taking on credit with national and regional institutions. A rise in capital expenditure typically boosts greater borrowing, and positively affects revenue for the National and Regional Commercial Banks industry. However, total capital expenditure, particularly from the private sector, is expected to decline significantly in 2019-20. With several major players reporting a downgrade of expected earnings and an expected increase of credit defaults attributed to the pandemic, revenue for the National and Regional Commercial Banks industry is anticipated to decline by 4.7% in 2019-20.
Despite the currently challenging operating environment, as the Australian economy starts to recover from the effects of COVID-19, interest rates are forecast to rise, allowing banks to generate more revenue on their loan portfolios. The RBA is projected to increase the cash rate over the next five years as the economy improves, and lending activities resume. As a result, industry revenue is projected to grow at an annualised 3.7% over the five years through 2024-25, to total $176.8 billion.
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