Fintech chase weighs on bank profits

Ian Rogers
The squeeze on industry profits flowing from the low level of interest rates is showing through most clearly among Australia's smallest ADIs.

APRA's quarterly performance statistics reveal that the return on equity halved over the June 2019 quarter for the 47 remaining credit unions and building societies, a cohort that excludes mutual banks.

ROE in the June quarter for this sector was 2.4 per cent, down from 4.2 per cent in the March quarter and 4.9 per cent in the September 2018 quarter.

Over the financial year, the ROE for all CUBS fell to 3.9 per cent, from 4.8 per cent in FY2018.

For the remainder of the banking sector (with 99 per cent of industry assets), the profit slump is almost as severe, though system ROEs remain in double digits.

ROE for FY2019 was 11.6 per cent, down from 12.8 per cent in FY19. The fall in return on assets was more modest, down 10 basis points to 0.7 per cent.

Cost control - a big theme, especially at listed banks - may not playing out too well, however, as banks drive hard on investment in digital.

Operating costs across the industry were A$55.8 billion, up 3.1 per cent over the year.

Aggregate payroll of $27.5. billion was up 0.8 per cent.

The overall cost to income ratio, a favoured efficiency measure, is one measure of the pain the industry is in. In FY2019 the CI ratio was 52.0 per cent, up from 48.7 per cent over one year.

Operating expenses to assets, on the other hand, at 1.2 per cent, have been steady in banking for more than two years.

The non-interest income share, system-wide, dived to 27.6 per cent this year, from 30.3 per cent in 2018.

Asset quality at least is stable, with the ratio of impaired loans at 0.4 per cent for all banks year on year. On this metric credit unions have the advantage, with this ratio at 0.2 per cent, also steady.

APRA supervised 239 ADIs back in 2004, the year this dataset begins.

Consolidation and the search for efficiencies reduced this number to 136 by mid 2018. The number of banks in Australia is now 140 and climbing.