Ian Pollari

KPMG analysis finds that the Australian major banks (‘the majors’) have reported a continued decline in aggregate cash profits for the first half of 2019.

KPMG’s Major Australian Banks Half Year Analysis Report 2018-19 finds that the majors reported a combined cash profit after tax from continuing operations of $14.5 billion for the first half of 2019, down 4.0 percent (compared to first half of 2018).

The majors face challenging conditions from slowing lending growth and margin compression at the same time as delinquencies rise in a softer domestic economy. In addition, remediation costs are a major drag on performance, as the majors seek to rebuild trust with customers post the Royal Commission.

Ian Pollari, KPMG Australia’s Head of Banking commented: “Falling housing demand, tightening credit standards and greater competition, in particular from the non-bank sector, have combined to constrain the major’s revenue performance in retail banking.”

“As the headwinds show no signs of abating, the majors will need to carefully balance their revenue, capital management and cost objectives to preserve industry returns, at the same time as they execute on large, complex regulatory change programs to restore trust in the sector,” Mr Pollari added.

The majors have continued to allocate a greater proportion of their spending towards risk and compliance, rising substantially to comprise almost 40 percent of the majors’ total investment expenditure for the first half of 2019.  Faced with growing competition from non-bank lenders and new entrants, the majors will need to balance this investment profile with digitalisation and innovation to maintain market share and deliver an enhanced customer experience.

Hessel Verbeek, KPMG Partner, Banking Strategy, said: “As the majors deal with risk and compliance challenges, they will continue to focus their efforts on simplification as they seek to drive greater efficiency in their core franchises to manage their financial performance.”

Key highlights of the results are as follows:

·        The majors reported a cash profit after tax from continuing operations of $14.5 billion for the first half of 2019, down 4.0 percent (compared to first half of 2018). The deterioration in cash profits was driven by lower net interest and non-interest income in a challenging operating environment, margin pressure, and rising regulatory and customer-related remediation costs.

·        The major banks recorded an average net interest margin of 195 basis points (cash basis), down 11 basis point compared to the first half of 2018, largely driven by customers switching from higher margin interest-only home loans to principal and interest and increased short-term wholesale funding costs.

·        The majors recorded a decline in net interest income (cash basis) of 1.6 percent from the first half of 2018 to $31.6 billion and non-interest income (cash basis) decreased by 11.1 percent compared to first half to $9.6 billion, due to customer remediation (reversal of revenue) and lower fee income. Housing credit recorded an increase of 1.5 percent in the half, with non-housing credit growing a modest 1.3 percent.

·        The average cost-to-income ratio increased by 47 basis points across the majors from the first half of 2018 to 46.1 percent, attributed to higher customer remediation costs and lower revenue in the first half of 2019, partly offset by the non-recurrence of some one-off items in the prior comparative period.

·        The major banks’ aggregate charge for bad and doubtful debts decreased by $23 million to $1.8 billion (statutory basis) for the first half of 2019 (down 1.3 percent on first half of 2018), with lower collective provisions for some of the major banks, partly offset by higher individual credit impairment charges.

·        The majors’ continued to increase their capital position, with an increase of 25 basis points over the half year in their average Common Equity Tier 1 (CET1) capital ratio to an average of 10.8 percent of risk-weighted assets (RWAs), reflecting the continued focus in meeting increased regulatory capital requirements. At the same time, maintaining the level of dividends have proved challenging during the half.

·        With lower revenue, rising regulatory costs and ongoing customer remediation, the majors’ return on equity (ROE) has decreased 88 basis points from the first half of 2018 to an average ROE of 12.0 percent, with average dividend payout ratios increasing to 78.4%, up 79 basis points from 1H18.

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Ian Pollari

2018 saw Australia’s mutual banks, building societies and credit unions (the ‘Mutuals’) continue to grow in an environment characterised by low interest rates, increased competition, a new wave of technological innovation and evolving customer preferences.

KPMG Australia’s Mutuals industry review 2018 finds that Mutuals’ balance sheets grew 5.6 percent (2017: 7.3 percent) to $8.9b, while overall operating profit before tax grew by 4.6 percent (2017: fell 4.3 percent) to $634.8m (2017: $606.7m) as the squeeze on net interest margins (NIM) has started to stabilise.

Ian Pollari, National Head of Banking for KPMG Australia, commented: “The 2018 financial year saw the Mutuals record slower growth compared to previous years in a challenging operating environment for the banking industry as a whole.”

“In the face of industry-wide headwinds, the Mutuals continue to perform strongly and looking ahead will seek to differentiate the home loan experience through better member service and mobile product offerings, underpinned by investment in digital technology,” he said.

Key financial results for the Mutual sector for the year are:

• Residential lending increased by 6.6 percent (2017: 10.4 percent) to $89.5b
• Deposits increased by 5.0 percent (2017: 10.8 percent) to $91.9b
• Technology spend increased by 5.7 percent (2017: 16.4 percent) to $182.9m
• Net interest margin increased by 1bp (2017: dropped 11bps) to 2.04 percent
• Non-interest income decreased by 1.9 percent (2017: increased by 1.1 percent) to $555.9m
• Impairment expenses remained steady at 0.04 percent of average gross receivables (2017: 0.04 percent)
• Capital levels increased slightly to 16.36 percent (2017: 16.06 percent).

The Mutuals’ performance has been underpinned by their continued effort in streamlining operations, enhancing products and services, investing in technologies to enhance the customer experience, maintaining pricing discipline, and in some cases, merging to gain economies of scale. When questioned what about the best way to continue this improvement, the three biggest opportunities identified by the Mutuals were improving efficiency (27.7 percent), more collaboration with alliance partners (23.4 percent) and more collaboration with peers (17.0 percent).

Brendan Twining, KPMG National Sector Leader, Mutuals, commented: “Going forward, Mutuals must continue to take ownership of their customer advocacy and branding efforts and own the trust narrative through their interactions with all stakeholders.”

“The success of the Mutual sector lies in their ability to retain their strong branding as ‘community focused’ and providing clear solutions that are aligned to members interests,” he added.

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Ian Pollari

New KPMG research finds that the Australian major banks (‘the majors’) have reported a decrease in aggregate cash profits for the 2018 full year, as they restructure and simplify their business models in order to regain trust and position for a more challenging operating environment.

KPMG’s Major Australian Banks Full Year Analysis Report 2017-18 finds that the majors reported a cash profit after tax from continuing operations of $29.5 billion for the 2018 full year, down 5.5 percent (compared to 2017).

The result underscores a challenging regulatory and operating environment for the majors. They face slowing revenue growth, rising capital levels and increasing legal and remediation costs – at the same time as the industry works to rebuild trust with stakeholders.

Ian Pollari, KPMG Australia’s Head of Banking commented: “In the face of a number of structural factors impacting the banking industry simultaneously, the majors are executing against their restructuring and simplifications programs in order to reposition their business models for the future.”

“They are adapting their business mix, product portfolios and distribution strategies in response to the evolving operating and regulatory environment,” Mr Pollari added.

While remediation, legal and regulatory costs have risen substantially as a proportion of the major’s total expenditure, the banks will need to balance this spend with continued investment in digital and technology innovation in the face of growing threats from new players. This is especially relevant given the introduction of changes to the ADI licensing regime and Open Banking, which are intended to stimulate greater competition in the market.

Hessel Verbeek, KPMG Partner, Banking Strategy, said: “Not only have the various compliance and remediation costs translated into higher cost-to-income ratios, the majors’ investment spend in risk and compliance projects is also up strongly and in most cases investments on growth initiatives has decreased in a relative sense.”

“If this redirection of investment towards regulatory compliance continues over a protracted period of time and the majors are unable to maintain their historical levels of investment in digital and other competitive initiatives, it could impact on the level of innovation that Australian consumers and businesses are accustomed to from our banking industry. Trade-offs will inevitably need to be made,” Mr Verbeek added.

Key highlights of the results are as follows:

• The majors reported a cash profit after tax from continuing operations of $29.5 billion for the full year, down 5.5 percent (compared to 2017), driven by lower non-interest income and higher restructuring and regulatory costs.

• The major banks recorded an average net interest margin of 200 basis points (cash basis), down 1 basis point compared to 2017, primarily due to mortgage and deposit re-pricing offsetting lower earnings on capital, market’s income and the impact of the Major Bank Levy.

• The majors recorded net interest income growth (cash basis), increasing by 2.2 percent to $62.7 billion for the full year; while non-interest income (cash basis) decreased by 3.7 percent to $22.4 billion, due to asset disposals, the removal of certain fees (e.g. ATMs), customer redress and other regulatory changes (e.g. inter-change fees). Housing credit recorded credit growth in the full year of 3.3 percent, compared to non-housing credit which grew by 2.9 percent.

• The major banks’ aggregate charge for bad and doubtful debts decreased by $702 million to $3.3 billion (statutory basis) for the full year (down 17.7 percent on 2017), with lower individual credit impairment charges, partly offset by an increase in collective provisions for some of the major banks.

• The majors’ capital position continued to rise, with their average Common Equity Tier 1 (CET1) capital ratio rising by 25 basis points over the full year to an average of 10.6 percent of risk-weighted assets (RWAs), reflecting the impact of increased regulatory capital requirements.

• Slowing revenue growth, rising operating expenses and regulatory capital requirements continue to compress industry returns. The majors’ returns on equity (ROE) decreased by 134 basis points to an average ROE of 12.5 percent for the full year.
• The average cost-to-income ratio increased by 356 basis points across the majors to 46.6 percent, attributed to meeting rising regulatory compliance, legal and remediation requirements, as well as restructuring.

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Leona Murphy

Asia’s largest fintech innovation hub, Stone & Chalk, has announced the appointment of a new chairman and suite of new board members, as it prepares for its next phase of growth, transitioning out of “start-up” mode to “scale-up” mode itself.

After the conclusion of Stone & Chalk’s AGM in November, Leona Murphy, who had already served for three years on the board, will move up and replace Craig Dunn as Chairman, whose three-year term was set to expire.

Speaking on Craig’s departure, Stone & Chalk CEO, Alex Scandurra, said; “I will forever be grateful to have served as CEO alongside someone with the wealth of knowledge, experience, and passion for supporting Australian fintech as Craig Dunn has had these past three years.

“He has been incredibly generous with his time during his tenure, and remains dedicated to our higher purpose of building Asia’s leading fintech ecosystem. I look forward to a continued personal and professional relationship, with Craig remaining within the family as a Stone & Chalk Global Ambassador,” said Mr. Scandurra.

Leona will bring a vast range of relevant experience as she steps up to the new role, including 20 years in financial services, 10 years in C-Suite roles in Top 20 ASX-listed organisations, and multiple board positions across public, private and member based organisations.

“Leona was a natural choice to step into Craig’s very big shoes, given her demonstrated leadership and business success across a variety of relevant industries and business types,” continued Mr. Scandurra.

“She has more than proven her commitment to fostering and accelerating the development of our world-leading portfolio of fintechs during her tenure on our board over the last three years. She’s been instrumental in supporting the development of Stone & Chalk’s strategy, and continually exemplifies our core values of honesty, transparency, and integrity.

“Leona will be integral in helping to shape and guide our approach as we move into our next ‘ramp up’ phase, cementing our position not just as the natural centre of gravity for fintech in Australia, but as a destination for leading fintechs from across the globe,” said Mr. Scandurra.

Speaking of her appointment, Ms Murphy said, “I’m delighted to have been given such an exciting opportunity, and am deeply impressed by the exceptional quality of our new Board. It will be my pleasure to help guide Stone & Chalk’s transition into its next phase of growth alongside such a passionate Board and management team.”

New Board appointments include:

• Anthony Eisen (Executive Chair and co-founder of Afterpay; Melbourne-based)
• Aris Allegos (CEO of Co-Founder of Moula; HO in Melbourne, S&C resident in Sydney)
• Debra Taylor (COO of OpenSparkz; S&C resident in Sydney)
• Carol Trotman (COO of WordFlow; S&C resident in Sydney)
• Ron Arnold (Managing General Partner at IAG Firemark Ventures & Firemark Singapore, S&C corporate partner)
• Kylie Rixon (CRO of ANZ Digital and Wealth; S&C corporate partner)
• Richard Kimber (CEO and co-founder of Daisee)

The new recruits will also join Ian Pollari, who remains on as a director after joining at Stone & Chalk’s inception, and who is Global Co-Lead of KPMG’s Fintech practice and Head of KPMG’s Banking Sector in Australia.

All potential candidates were screened against the Stone & Chalk Board Skills Matrix, to ensure the final selection possessed a suitable mix of relevant skills, experience, diversity, and knowledge to guide and provide effective oversight of the company.

Of the final Board composition, six of its nine directors have successfully founded start-ups, five currently hold senior positions with leading fintech businesses in Australia, and three have senior leadership positions with corporate partners of Stone & Chalk. Nearly half are women, and all have extensive financial services experience.

“It’s well-known that boards with greater diversity across factors, such as industry background and experience, achieve higher revenue growth, profitability and shareholder returns than those without,” continued Mr Scandurra.

“As we head into our next phase of rapid expansion, we are confident that the team we have selected possesses the perfect balance of experience, skills, and perspectives to take us to the next level and beyond,” he concluded.

Pursuant to the Constitution of Stone & Chalk, all new directors will stand for election at the coming AGM in November 2018. For more information: www.stoneandchalk.com.au

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