Improving processes and customer service through better digital experiences and smarter use of data will be the key opportunity for the major banks after a disappointing results season, the major accountancy firms have suggested.
Four separate analysis pieces from each of the “big four” accountancy and business consultancy firms — Deloitte, EY, KPMG and PwC — have highlighted how the annual results from the four major banks demonstrate that the big banks face “pressure” for the foreseeable future as a result of remediation-related cost increases and slower income growth.
The analyses from the big four firms show that headline cash earnings of Australia and New Zealand Banking Group (ANZ), the Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) and Westpac Banking Group (Westpac) dropped by 5.5 per cent year-on-year, from $31.2 billion to $29.5 billion in the full year 2018.
Likewise, lending grew at just 3.1 per cent in FY18, the lowest growth rate in a decade.
Each of the accountancy firms noted challenging conditions, including the impact of ongoing regulatory reform, scrutiny from the ongoing financial services royal commission, competition from non-major banks and non-bank lenders, conduct challenges, customer remediation and the upcoming open banking regime.
As such, a key theme moving forward for the banks would be to shift to digitisation and focus on more technology-driven solutions, the analyses argued.
PwC’s 2018 Major Banks Analysis noted that the major banks are all simplifying, streamlining and rethinking their business architecture.
The report noted that the big four banks are investing in “digitisation, automation, artificial intelligence and connectivity”, noting that “ongoing pressures” augmented by the royal commission’s focus on transparency and sensitivity are resulting in “opportunities to expand customer penetration through digital and open banking”.
Further, PwC suggested that there would be “significant investment in digitisation and automation balanced by increased requirements on compliance, oversight and control”.
The report reads: “For three of the four banks that reported, investment spend overall is up by 34.7 per cent YOY [year-on-year] and 16.8 per cent HOH [half-on-half], reflecting the significant increase in investment in customer service technologies in the first half of the year, which we expect to continue. These investments include payment platforms and servicing technology, cloud infrastructure and digital offerings, as well as tools to improve employee and credit decisioning capability.
“Investment spend on risk and compliance (excluding remediation costs) was a focus of FY18, increasing by 33.4 per cent YOY and 46.6 per cent HOH due to increased spend on system upgrades for a range of initiatives such as comprehensive credit reporting, AASB 9, financial crimes and stronger super reforms.”
PwC Australia’s banking and capital markets leader, Colin Heath, added: “In the long run… especially with the introduction of open banking, we will continue to see choice being more clearly put into the hands of the customer.
“Banks that focus on becoming simpler, smaller and more deeply connected to customers should also be able to price more effectively, expand relevant services and maintain market share, as well as being more efficient and less error-prone by design.”
Likewise, EY’s analysis of the big four banks’ 2018 full-year results, noted the cost-to-income ratios ticking up due in part to “slowing revenue and upward cost pressures”.
EY Oceania’s banking and capital markets leader, Tim Dring, commented: “Unsurprisingly, slowing revenue and upward cost pressures have seen cost-to-income ratios tick up (to an average of 46.7 per cent), as the banks continue balancing investment in digitalisation and automation against rising remediation and compliance costs.
“Other external drivers, such as real-time payments, comprehensive credit reporting and open banking, are also pushing up expenses. APRA has recently raised concerns that the banks are not investing enough in maintaining existing core technology, and this increased scrutiny may prompt a renewed focus on re-platforming for some banks.”
EY suggested that the mandated roll-out of open banking in July 2019 would increase these “pressures” further, while a “renewed focus on new policy initiatives [would] increase competition in the sector from both sides of the political aisle”.
“In this environment, banks will need to bolster their financial performance by improving cost discipline, utilising technology to drive sustainable cost efficiencies and focusing on margin management to sustain revenues,” Mr Dring said.
“The challenge will be to do all this while also working to restore community trust and better align customer, shareholder, regulator and government expectations.”
In KPMG’s Major Australian Banks Full Year Analysis Report 2017–18, Ian Pollari, KPMG Australia’s head of banking, also recognised that majors were “repositioning their business models for the future” by “adapting their business mix, product portfolios and distribution strategies in response to the evolving operating and regulatory environment”.
Hessel Verbeek, KPMG partner for banking strategy, warned: “If this redirection of investment towards regulatory compliance continues over a protracted period of time and the majors are unable to maintain their historical levels of investment in digital and other competitive initiatives, it could impact on the level of innovation that Australian consumers and businesses are accustomed to from our banking industry.
“Trade-offs will inevitably need to be made.”
Meanwhile, Deloitte’s analysis of the 2018 results for the four major banks also came with a warning tone.
Entitled Flying into Turbulence – Australian Banking Sector 2018, the report pointed out that in aggregate, personnel costs make up more than half the four banks’ total expenses; technology a fifth; and other costs, including restructuring, remediation and regulatory costs, taking up about 20 per cent. Occupancy costs made up the remaining 10 per cent of costs.
Deloitte banking leader Paul Rehder said: “FY18 was a testing year for the major Australian banks.
“These conditions look set to continue into FY19. As well as facing the royal commission and the need to remediate and adapt their regulatory and compliance resourcing and structures, the banks are continuing to meet changing customer preferences and respond to digital disruption.”
Mr Rehder went on to argue that in an operating environment of low growth and tighter margins, it would be “very important” for the majors to “get both efficiency and business simplification right”.
“As the four major banks simplify their operating models, reduce their product portfolios and complexity, and rationalise their networks, they are increasing their use of digital channels, and driving scale economies in back-office operations through algorithms and automation,” the banking leader noted.
Mr Rehder concluded: “Banks are investing in digital transformation to improve customer experience, using data insights more effectively and investing in new payment channels.”
Annie Kane is the editor of The Adviser magazine, Australia’s leading magazine for mortgage brokers.
As well as writing news and features on the Australian mortgage market, financial regulation, fintechs and the wider lending market – Annie is also the host of the Elite Broker podcast and regulator contributor to the Mortgage Business Uncut podcast.
Before joining The Adviser team at Momentum Media in 2016, Annie wrote for a range of business and consumer titles, including The Guardian (Australia), BBC Music Magazine, Elle (Australia), BBC Countryfile, BBC Homes & Antiques, and Resource magazine.
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