Opinion
CBA lowers the curtain on a profit season banks would rather forget
Elizabeth Knight
Business columnistThe curious thing about Australia’s four big banks is their insistence on individuality – they highlight the difference in their profiles and strategies. But as the mini earnings season for banks wrapped up this week, it was their similarities that were more evident.
This season was not one that banks will be crowing about – all experienced a fall in profits and the themes were remarkably similar.
CBA boss Matt Comyn.Credit: Oscar Colman
First, they all came in just a titch above analyst expectations, and the share price verdict was positive for all but CBA, whose share price tumbled almost 2 per cent after it released its quarterly update.
All are licking their wounds sustained after a year of competing heavily in the mortgage market.
The mortgage battle was triggered by the massive refinancing event that has spanned the past 18 months as customers moved from fixed to variable interest rates.
That event is largely over now and at least some bank chief executives are suggesting the intensity of competition is easing – although it isn’t particularly evident in their respective results.
CBA chief Matt Comyn has been shouting from the rooftops that this margin squeezing competition was damaging the industry and that the CBA was not inclined to get into the mortgage mud wrestle and was prepared to sacrifice market share to stay out of it.
At the other end of the spectrum ANZ’s Shayne Elliott was happy to dive in head first. He also staged what will be one of the last inorganic growth opportunities, buying Suncorp bank for nearly $5 billion to gain a 2.4 per market share.
The notion that these super competitive mortgages – in particular if they were sold through mortgage brokers – were unprofitable is something banks are largely now admitting to.
This has weighed on the profitability of all four banks, including those that have attempted to stay out of the fray.
Another point on homogeneity is the position taken by all four to pursue or extend share buybacks.
This reflects two things. First, the banks are comfortably capitalised and in strong financial nick with arrears remaining low. Regulations around responsible lending and strong capital buffers have ensured this.
So that’s a tick. But the avalanche of buybacks and strong dividends also demonstrates that banks’ growth options are limited.
The banking royal commission put paid to any ambitions to grow outside their traditional core banking operations. In the wake of the royal commission, wealth management and insurance divisions (where most of the misconduct was found) were jettisoned.
Earnings season showed the big four banks experienced a fall in profits and the themes were remarkably similar.Credit: Dominic Lorrimer
So expansion outside core banking is no longer a source of growth.
And decades of poor international acquisitions that were later abandoned has left the current batch of chief executives without a shareholder mandate to grow offshore – even if they had a mind to do it.
Of course shareholders, and retail shareholders in particular, love the dividends and buybacks and the receipt of franking credits, which in part explains why bank shares have generally been so strong.
But it means growth has to come from taking market share, so banks are effectively left to eat each other.
Migration is perhaps the only tailwind and Comyn referenced growth in new transaction accounts from this cohort as a positive element to the results.
But migrants tend to rent for a couple of years before moving into the buyers market. The latest large influx is also putting a strain on housing. And the general deterioration in housing affordability is limiting credit growth across the banking sector.
With higher for longer being the message on interest rates, it’s difficult to see where the growth in banking will come from – at least in the short to medium term.
Read more:
- When interest rates eventually fall, banks will face a critical decision
- Banks are changing the way they fight the mortgage war
- NAB boss says most of its home loans are written at a discount
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