Bank profits hit early 1990s levels

National Australia Bank branch, Sydney. Picture: Hollie Adams/The Australian

The major banks have put in their worst annual results in almost three decades, with returns plunging to their lowest level since the last recession in the early 1990s.

As cash profit for 2020 slumped 35.5 per cent to $17.4bn — the first time since the global financial crisis since earnings fell below $20bn — the sector’s average return on equity tumbled 428 basis points to 6.7 per cent.

This was the first single-digit ROE since 1993.

PwC banking and capital markets leader Colin Heath said it was no surprise to see results under such pressure.

“Given where we were six months ago, it’s notable that cash earnings are at this stage no worse than they were in the global financial crisis, despite the pandemic having a much greater impact on the Australian economy,” Mr Heath said.

The reason, he said, was the extent of the Morrison government’s support for the economy, and the part played by the banking industry as a shock absorber during the pandemic.

Despite the huge pressure on earnings, there was a case for “alert optimism” about the next few years, with the banks better prepared, more focused and acutely aware of the importance of good conduct.

Credit provisions, capital and liquidity were at their highest levels in years, providing a strong platform to support customers and the wider economy.

The main drivers of the sector’s sharply lower profit were the pandemic-induced recession, along with the peak of remediation and restructuring costs.

The credit impairment expense jumped 202 per cent to $11.2bn due to large overlays and provisions for the crisis, although realised losses were yet to emerge.

Total credit provisions surged 43 per cent to $23.7bn in anticipation of COVID-19’s impact, with the second-half increase more modest than the first.

Provisions, for now, were below the levels of the GFC.

Margins, on the other hand, hit a record low of 1.89 per cent, down five basis points.

KPMG Australia head of banking Ian Pollari said the ­majors had shown themselves to be resilient over the course of the year due to the strength of their balance sheets.

The average common-equity tier-one ratio increased by 59 basis points to 11.4 per cent, due to capital management including divestment of non-core businesses, dividend reinvestment plans, prudent management of dividends and capital raisings. As the focus shifted to recovery, Mr Pollari said the majors would need to tread carefully in extending liquidity or deferral measures, and remain vigilant in assessing the solvency of borrowers.

EY Oceania banking and capital markets leader Tim Dring said the big four continued to face earnings challenges, but their ­financial position remained sound due to strong capital and liquidity levels.

“However, it really is a waiting game and the banks are bracing for impact, with the full effects of the economic downturn on asset quality yet to play out,” Mr Dring said. “While the banks are preparing for portfolio distress, the true scale won’t be revealed until forbearance programs and income support measures draw to a planned close in the first quarter of the 2021 calendar year.”