Half-year results reported by ANZ and National Australia Bank last week show that the big banks are struggling to achieve revenue growth in their key Australian retail and banking divisions. Commentaries provided with the results indicate that this situation will continue.
The banks will have to rely on cost cutting and contributions from other parts of their business to increase earnings and dividends over the next couple of years.
One of the risks in relying on cutting costs to improve the bottom line is that it can put the brakes on future revenue growth.
Net interest income from ANZ’s Australian retail and business banking division grew just one per cent over the 12 months to March and did not grow at all over the six months to March.
In NAB’s case, net interest income in its consumer banking and wealth division fell 0.4 per cent over the 12 months to March but picked up in the six months to March – growing by 2.6 per cent.
ANZ chief executive Shayne Elliott says the bank “stepped back” from the mortgage market in the September half last year, concerned that heavy discounting on new loans would erode its margin.
Elliott says that the bank picked up its lending activity in the March half and has returned to growth in line with the industry average.
However, that industry average is likely to be lower. “Lower domestic credit growth will be a headwind for the business. Six per cent credit growth and two per cent wage growth, which we have had, is not sustainable. We see credit growth going lower,” Elliott says.
The bank’s response has been to attack costs, which were down 14 per cent over the 12 months to March. It has reduced headcount by 2800 “full-time equivalents” over the past year.
In addition to cutting costs, Elliott says the bank will aim to generate higher earnings by continuing to re-price loans, improving the credit quality of its loan portfolios, taking other “de-risking” measures and being smarter about how it allocates its capital. It is also investing in a range of digital services.
“We have to focus on customers who value what we do and will pay for it,” he says.
NAB chief executive Andrew Thorburn says risks to the bank’s operating environment include regulatory changes (the recent limit imposed on interest-only lending), high household debt levels and digital disruption.
Like Elliott, Thorburn says cost cutting and investment in digital services will see the bank increase its earnings and return on equity, despite the lack of revenue growth in its retail banking business.
NAB reduced its headcount by 700 full-time equivalent in the March half and limited growth in operating expenses to 0.8 per cent over the 12 months to March.
Thorburn says NAB’s personal banking platform is “world class” following the injection of some technology. “Our home loan approval ‘time to yes’ is down to five days for 55 per cent or our customers,” he says.
“We have a single application process for multiple products, online document delivery and instant online conditional loan approval.”
ANZ’s latest result produced a return on equity of 11.8 per cent (up from 9.7 per cent in the March half last year). The bank declared a fully franked dividend of 80 cents a share – unchanged from the previous corresponding period.
NAB’s ROE was 14 per cent (down from 14.3 per cent in the March half last year). The bank declared a fully franked dividend of 99 cents a share – unchanged from the previous corresponding period.