Sep 30 2020
The COVID-19 pandemic has induced a rapid and unprecedented transition in the National and Regional Commercial Banks industry. In the wake of the pandemic, banks will need to grapple with lower interest rates, weaker economic growth, higher non-performing loans, and accelerating disruption from new technologies and new competitors. However, Australian banks will also benefit from a weaker regulatory burden, such as the Federal Governments’ removal of the responsible lending laws announced last week.
Shifts in retail banking behaviour
New behaviours adopted during the COVID-19 pandemic will likely become permanent fixtures of the banking landscape. The shift to online banking has accelerated, as social distancing requirements and health awareness have encouraged consumers to conduct their banking online, rather than in person at branches. Major players across the industry have announced plans to close branches, as the need for these facilities has lessened following the COVID-19 pandemic. For example, Suncorp announced the closure of 20 branches amid low demand in September. Advances in online banking have reduced the need for an extensive branch network, as highlighted by the market penetration of neobanks and banks with a low physical presence, such as Citigroup and ING. The closure of unnecessary branches is expected to assist banking profitability, as wages and rent accounted for 16.1% and 1.4% of industry revenue, respectively, in 2019-20.
The COVID-19 pandemic has also accelerated the end of cash transactions, as consumers have increasingly used cashless payment technology. Cash withdrawals from ATMs have been in gradual decline for many years, but fell significantly during the first months of the COVID-19 pandemic. While withdrawals have since rebounded, overall cash use is expected to remain subdued compared with levels prior to the pandemic.
The importance of banking institutions as social stakeholders has also become clear. Banks are now clearly aware of the reputational risk they face if customers feel they are treated unfairly. In the wake of the 2019 Banking Royal Commission and numerous other scandals such as the Westpac AUSTRAC controversy, major banks have appeared eager to collaborate with government to improve social outcomes. Commonwealth Bank, which maintains a 22.6% market share, has provided repayment deferrals on over 159,000 home loans, comprising a total balance of over $55 billion. The bank has also deferred payment on 21,000 personal loans and 19,000 credit cards. Other major banks have also enacted similar policies, such as National Australia Bank reducing minimum monthly repayments for credit card customers and waiving late payment fees.
More than 900,000 Australian loans have been deferred since the start of the pandemic and at least half of that number will be assessed in the coming weeks. Over 650,000 Australians are expected to defer their mortgages until 2021.
Banks will need to adapt to changing consumer preferences, particularly regarding financial security. Consumers will likely reduce their demand for risky debt, particularly as consumer sentiment is expected to remain negative until 2022-23. However, banks are anticipated to offer more products for risk-averse consumers, including savings, investments, insurance and income-smoothing products.
Lower interest rates for longer
The cash rate in Australia is currently at 0.25%, its lowest level in history. This ultra-low rate environment has squeezed the profitability of Australia’s major banks, trimming the net margins between interest received on loans and interest paid to deposit holders. The cash rate is expected to remain low for an extended period to support a struggling rebound from the COVID-19 pandemic. Although the Reserve Bank of Australia has previously stated that 0.25% represents the absolute minimum rate setting, market expectations for a further rate cut are high. As at September 30th, bond yields indicated a 67% expectation of an interest rate cut to 0.00% at the next RBA Board meeting on October 6th. Australian banks are now confronted with the real possibility of the RBA introducing negative interest rates, following the lead of Europe and Japan.
Profit in a low-rate world
Profitability for the National and Regional Commercial Banks industry is expected to be subdued over the next five years. Elevated loan losses and repayment deferrals, and persistently low interest rates are anticipated to exert downward pressure on profit, which accounted for 26.2% of industry revenue in 2019-20. Reduced demand for home loans, particularly as net immigration falls and unemployment remains elevated, will also likely undermine profitability.
To maintain profitability in a low-rate environment, banks will need to pursue, develop and monetise a wider range of services to diversify income beyond net interest margins. For example, banks may expand into the Buy Now Pay Later industry to attract new customers, particularly as consumer demand for credit cards is in decline. Banks may also seek new revenue streams through a presence in the fledgling Cryptocurrency Exchanges industry. A key growth opportunity for banks is the ability to sell data-driven insights to their business customers by harnessing the powerful stores of consumer information they control.
Banks will increasingly need to innovate and remain on the cutting edge of banking service abilities over the next five years, as a range of new entrants ramp up pressure on entrenched major players. Online-only neobanks such as Xinja, 86 400, Up and Volt have already ramped up competition in the banking sector, offering competitive interest rates that larger players struggle to match. Neobanks can do this due their total reliance on online banking, which has lower expenses than physical branches.
Neobanks remain a fairly minor element of the National and Regional Commercial Banks industry, with minimal market share. However, much larger threats for the major players lurk on the horizon. Technology giants have become increasingly willing to move into service areas typically controlled by banks. For example, in August 2019, Apple launched its own credit facility, Apple Card, in the United States. In June 2020, Amazon unveiled a partnership with Goldman Sachs to provide revolving credit lines to small businesses. Australian banks will need to be ready to compete with powerful disruptors in the industry over the next five years.
IBISWorld company reports used to develop this release:
- Commonwealth Bank of Australia
- Australia and New Zealand Banking Group
- National Australia Bank
- Westpac Banking Corporation
IBISWorld reports used to develop this release:
- National and Regional Commercial Banks in Australia
- Buy Now Pay Later in Australia
- Cryptocurrency Exchanges in Australia
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647