Challenges Ahead for the Big Four Banks

The big four banks reported combined cash profits of $28.5 billion, but signs point to tough conditions, according to EY and KPMG.

The majors reported combined after-tax cash profit from continuing operations of $28.5 billion for the year, a 7.2% increase over FY21 and a 65% increase over FY20.

The firms said banks faced the combined challenges of the uncertain global economic environment, the potential for future loan losses, inflationary pressures and the impact of rising rates on loan repayments.

Although banks embarked on cost-cutting measures and simplification initiatives, their costs were unlikely to fall further given inflationary pressures on wages and costs. All major banks have signaled that their cost targets will either be adjusted or dropped as these inflationary pressures continue.

There was also the necessary technology investment in customer experience and productivity improvements to support growth strategies.

Instead, they would need a cost transformation approach that could remove complexity and improve operational efficiency of processes, data, systems, and controls.

Doug Nixon, Head of Banking and Capital Markets, EY Oceania, said: “The resilient 2022 performance of Australia’s big banks puts them in a strong position to navigate the way forward. Those who manage to successfully manage the margin opportunities resulting from rising interest rates have the opportunity to profit from the rise in a highly competitive domestic market.

“In this challenging operating environment, banks need a new cost transformation approach more than ever, one that can remove complexity and improve operational efficiency across processes, data, systems and controls. While tactical, incremental cost reduction still has a place, banks will need to become more strategic in their overall cost transformation journeys,” Nixon said.

KPMG banking partner Maria Trinci added: “What will prove interesting is the evolution of costs, with inflation putting additional pressure on the pace of transformation. Against the backdrop of a tight labor market, competition for skilled resources will put pressure on personnel costs as banks react to attract and retain the right skills.”