he Australian major banks have reported a decline in financial performance for the full financial year 2020, with a combined cash profit after tax from continuing operations of $17.4 billion, down 36.6 percent on FY2019. As the impact of the COVID-19 pandemic continues to evolve, the banks have maintained a strong focus on supporting their staff and customers, as they demonstrated resilient operations and continued lending.
FY2020 has also been a year when interest margins have continued their downward trajectory (in a record low interest rate environment), costs have remained stubbornly high and significant extraordinary items, such as customer remediation and regulatory charges, heavily influenced the full year results. While the banks have significantly increased their loan loss provisions and allowed customers to defer loan repayments, to date their actual loss experience has been minimal. The open question is to what extent loan losses will materialise in 2021, as the Commonwealth Government unwinds its economic support measures.
Full Year 2020 Results Snapshot
An infographic snapshot of the major Australian bank’s full year financial results.
Key highlights of the results:
- Total operating income (cash basis) declined 1.7 percent to $79.3 billion, reflecting subdued lending conditions and an ongoing decline in margins. The Majors grew their mortgage books by a combined 1.6 percent in FY2020, with non-housing lending contracting by 3.4 percent.
- The Majors reported a cash profit after tax from continuing operations of $17.4 billion, down 36.6 percent compared to FY2019. This decrease is a consistent trend across the Majors and reflects downwards pressure on margins, higher loan loss provisions and significant ongoing remediation and regulatory costs.
- Cost-to-income ratios have increased from an average of 47.2 percent to 53.2 percent, in large part driven by customer remediation and higher IT related expenses, which included increased costs associated with mobilising the workforce for remote working conditions and higher software amortisation charges.
- Credit quality has deteriorated as a result of the COVID-19 pandemic and continued uncertainty in the economic outlook, leading to an increase of 28 basis points in impairment charges as a percentage of gross loans and advances. As of year-end, the total Expected Credit Loss provision is $24.8 billion, and aggregated loan impairment expense has increased by 201 percent to $11.2 billion. This reflected both the impact of COVID-19, as well as a broader credit deterioration.
- The average Common Equity Tier 1 (CET1) capital ratio increased 59 basis points to 11.4 percent, driven by capital management initiatives including divestment of non-core businesses, dividend reinvestment plans, prudent dividend management as well as capital raisings by two of the Majors.
- The major banks recorded an average net interest margin of 189 basis points (cash basis), down 5 basis points compared to the FY2019, largely driven by repricing of both deposits and mortgage and business lending assets, amidst RBA rate cuts and increased competition in the market.
- Rising bad and doubtful debts, increasing capital and subdued growth sees return on equity (ROE) continue to fall, decreasing by 458 basis points to an average of 6.7 percent. Mounting risks will continue to keep pressure on returns.