Banks notch up their highest profit jump in four years and can ride out a downturn, says KPMG

The big banks’ combined profit of $28.5bn is the highest in four years – but also the ‘last calm before the storm’, says KPMG.

National Australia Bank rounded out the major bank results on Wednesday. Picture: AAP

The major banks are experiencing the “last calm before the storm” after reporting a jump in combined 2022 profits to $28.5bn – the highest level in four years.

That’s the view of KPMG, which analysed the big four banks’ profits after National Australia Bank rounded out reporting season on Wednesday.

KPMG’s analysis found the big four posted combined cash profit after tax, from continuing operations, of $28.5bn, up 6.5 per cent on their financial 2021 years and the highest result since 2018.

Dividend payout ratios were steady for 2022 at 71 per cent, but below a combined pre-pandemic level of 81.3 per cent.

Earnings growth buoyed return on equity across the big four; the average increasing by 67 basis points to almost 10.6 per cent.

Despite rising interest rates helping bank net interest margins, the sector is positioning for a more challenging environment as the economy and credit growth slows and loan losses eventually rise.

KPMG Australia head of banking Steve Jackson noted that the sector was in a position of strength to navigate a potential economic slowdown and a rise in bad debts.

“It’s all going to depend on how fast and how high rates go – as the (Reserve Bank) continues the monetary policy tightening cycle – as to whether or not we’re going to see some big shifts,” he said.

“The existing credit quality of their books is very strong, back to pre-pandemic levels so all of the signals we were getting in this reporting period were strong and positive.”

Sam Garland, PwC’s banking and capital markets leader, said that although the major banks were in a position of strength, a number of risks were looming.

“There are borrowers who have never experienced any rate hike in Australia, and probably very few who remember the last time rates rose this quickly, which was 1994,” he said. “It’s inevitable that rising repayments will cause stress for some customers, so it‘s really a question of how strong are the buffers that people have in place and their ability to adjust.

“In the coming year we will face a number of challenges …

“These include falling asset values (and housing), reduced demand for loans, lingering supply constraints, especially labour, food and energy.

“It’s likely that, as the global economy pivots in the face of these challenges, that it – but not necessarily Australia – moves into recession, with the consequences that implies.”

PwC’s analysis of the major banks’ results showed the combined net interest margin, or what banks earn on loans less funding and other costs, fell nine basis points to a record low 1.77 per cent for 2022.

But interest rate rises resulted in the banks finishing their respective financial years with margins expanding, as they raised mortgage rates at a faster pace than deposit rates.

NAB, Westpac and ANZ ruled off their financial years on September 30, while Commonwealth Bank has a June 30 year end.

PwC said that, across the major banks, excluding notable items, operating expenses edged up just 0.9 per cent compared with 2021.

EY’s analysis pointed to inflationary pressures remaining a challenge for the big banks.

“Although all the major banks are maintaining their focus on productivity and simplification initiatives, costs seem unlikely to fall further any time soon given wage and other cost inflation pressures, as well as the technology investment needed for customer experience and productivity improve-ments to support growth,” said Doug Nixon, EY’s Oceania banking and capital markets leader.

Mr Jackson said on Wednesday: “All the banks are tackling that full end-to-end digitisation and automation … where those major cost elements are.”