Banks Well Placed To Weather The COVID Storm

Two surveys yesterday from major accounting firms confirmed confidence in the outlook for the country’s big four banks – the CBA, ANZ, NAB, and Westpac, even though it is confused and clouded.

Both KPMG and Deloitte examined the interim reports from the four and see the banks better placed for the immediate future than it might seem from the results which all saw a surge in bad debt provisioning, loan impairments and provisions for compensation and other payments to customers because of the findings from the Hayne royal commission.

Dividends were suspended in two cases – Westpac (94 cents a share 2019 interim) and ANZ (80 cents a share), cut by the NAB to 30 cents a share from 80 cents, and left unchanged by the CBA at $2.00 a share (with a final of $2.31, now in doubt) – but that was ahead of the pandemic sweeping over the economy here and offshore.

After what the economy and workforce have been through in the past three months it’s no wonder the interim reports from the NAB, ANZ, and Westpac (the Commonwealth’s was delivered in February well before COVID-19 became an issue), were battered and bruised with all banks and their customers large and small facing a very confused and uncertain future.

The banks boosted their provisioning, but there is more to go with the Commonwealth as the largest, has a couple of billion in additions to its provisions coming on June 30.

KPMG’s latest report on major banks finds combined post-tax profit is down more than 42% to $8.3 billion for the six months to March 31, from $14.5 billion a year ago.

Naturally, given the weakening economy, rising unemployment, shuttered business (because of the lockdowns) costs have increased and credit quality is falling – both obvious outcomes of an economy sliding into recession.

KPMG sees the banks, however, having the potential to have a ‘good’ crisis compared with the last few years of scandal after scandal with the dodgy treatment of clients of all types (including the dead).

That culminated in the Hayne royal commission and a raft of claims and examples that saw the NAB lose its chair and CEO. It found a new chair and a new CEO in the shape of the experienced Ross McEwan.

Westpac lost a CEO and a chair because of its breaches of money laundering laws. That was after the Commonwealth lost a CEO and senior executives for its own money-laundering scandal.

KPMG said that looking forward, “the banks will play an important part in the domestic economic recovery and this gives them an opportunity to ‘’rebuild community trust and purpose, much of which was lost during the (banking) Royal Commission’’.

“The biggest challenge for the Majors will be balancing the necessary support for the recovery effort and in doing so, restoring their reputations, whilst at the same time navigating a number of structural headwinds,” KPMG’s head of banking for Australia, Ian Pollari, said.

“The Majors have the opportunity to use COVID-19 as a catalyst to accelerate their digital transformation, simplification, and operational resilience efforts.”

Deloitte said in its report that “Given their strong balance sheets, Australia’s banks and the four majors are extending significant support to Australian businesses and households, to help cushion them through the crisis.

“However, the banks themselves have said that they cannot be expected to save the entire economy. ANZ CEO Shayne Elliott has said: “We are the Intensive Care Units of the economy, and, like emergency medical practitioners, we will ultimately have the unenviable task of deciding which businesses to save or not.”

Deloitte’s Banking & Capital Markets Partner Steven Cunico, said in a commentary in its report on Monday: “Since the start of this year the majors have collectively lost approximately $116bn (~31%) in market capitalisation, so there is no question that the COVID-19 pandemic has brought extraordinary challenges to the Australian banking sector.”

“The economic outlook for the next 12-18 months is incredibly uncertain. While the banks are well funded to support their customers through the crisis, they still have to make sure that they allocate their finite resources in the right direction.

“Nevertheless, the sector is well-positioned to withstand the structural economic shock compared to their capital reserves going into the Global Financial Crisis.

“The Reserve Bank of Australia noted in its latest Financial Stability Review, that the stress tests of Australian banks show they have sufficient capital to withstand quite severe downturns.”

Deloitte also sees the banks taking advantage of the lockdowns and social distancing to turn themselves into digital operations far more quickly than previously thought.

That will be bad news for the fintech sector which is under pressure from not being a bank or supported by one of the big four.

According to the surveys the interim results for the big four showed:

– COVID-19 has caused credit risk to increase significantly – $3.4 billion of extra loan loss provisions.

–  Weakening total income which fell 3% to $ 39.9 billion for the half.

– The aggregate 1H FY20 cash profit of the major banks declined by $6.2 billion to $8.3 billion.

– Total operating expenses were up 14.2% to $21.5 billion.

– Bottom-line results were impacted by $3.6 billion of large, notable one-off items

– Lending growth slowed to 2.9%- Net Interest Margin declined by around 3bps, driven by the impact of the three rate cuts in 2019, even if the banks didn’t pass the 0.75% reduction in full to customers.

– Capital and liquidity positions are strong – however dividends have been cut as we saw with the NAB, ANZ and Westpac – the smaller regional operator, Bank of Queensland started the trend mid-April by deferring its payout to shareholders.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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