Macquarie analysts say Australia’s biggest banks face headwinds from rising labour costs

Analysts say the banking sector will disappoint due to its ‘weak track record’ of managing expenses.

A pick-up in wages growth and investment spend is expected to result in significant headwinds for the country’s major banks, and analysts at Macquarie have downgraded the outlook for the sector.

The broker says that with more than 70 per cent of expenses by the major banks relating to people, cost bases in the sector are likely to stay under pressure.

It expects that this will result in a further 1 to 7 per cent headwind to expense growth between now and the 2026 financial year from higher amortisation expenses and rising investment spend.

Analysts at Macquarie’s research section have made a further 1 to 2 per cent downgrade to earnings per share for Commonwealth Bank, Westpac, NAB and ANZ and are now up to 5 per cent above consensus on expenses.

Macquarie said that personnel expenses were 55 per cent of all costs which the big four had, and that grew to 70 per cent when the cost of external providers were factored in.

While it said that banks were reluctant to disclose the proportion of staff covered by enterprise bargaining agreements, it appeared they have negotiated 2 to 5 per cent wage increases in the 2023 financial year and up to 4.5 per cent in fiscal year 2024 – and up to 4 per cent in 2025.

Macquarie analysts say that the banking sector has a weak track record at managing costs. Picture: Britta Campion.

“On an aggregate basis, including turnover in staff, we expect wage inflation to be at the upper end of these bands. Additionally, vendor and technology costs are likely to rise by more than inflation, given the attractive pricing achieved during the Covid period is unwinding,” Macquarie said.

“The industry’s weak track record of managing expenses, even in periods of subdued inflation, suggests expense growth will likely continue to disappoint in the current environment.”

The concern of rising employee expenses within the financial sector comes after Seek’s latest advertised salary index, showed that wages were up 4.8 per cent in the 12 months to August – pegging just below the monthly inflation reading from the Australian Bureau of Statistics of 5.2 per cent in August.

Even with persistent investment in digitisation and automation by the major banks, the broker noted that full-time equivalent numbers have risen since the 2020 financial year despite divestments across the banks.

“Additionally, professional services fees, while not directly comparable across peers, have diverged as third-party suppliers, consultants (which we understand banks pay $200m-$400m per annum), and contractors continue to inflate bank cost numbers,” analysts said.

“While WBC showed some improvement, moderating towards CBA and NAB, ANZ has continued to see a divergence from peers.”

Regional banks were forecasted to continue to be “disadvantaged” in the current environment as they faced the pressure to invest to keep up, albeit with a lower asset base to amortise the expenditure, Macquarie said.

The broker downgraded both Bendigo Bank and Bank of Queensland to an underperform recommendation.