Global professional services specialist KPMG has published a review of the country’s major banks, find they continue to perform well on the global stage, despite some negative effects in the global funding markets and ongoing structural change.

 

KPMG’s Major Australian Banks Half Year 2012 report found that the major banks have posted a healthy profit in the 2011-12 half year, with a combined cash profit of $12.6 billion after tax, an increase of 2.4 per cent from the second half of last year.

 

“The major banks’ profit clearly shows we have a strong banking system, however it must be viewed in light of the increased capital that the banks now need to hold. Return on equity (ROE) remains around 16% for most banks and shareholders will need to accept that this level of return is all they can expect for the foreseeable future,” said KPMG’s head of banking, Andrew Dickinson.

 

The banks posted a statutory profit before tax of $16.8 billion before tax, compared to $16.3 billion in the same period last year.

 

The banks’ biggest challenge is adapting their business model to cope with the competing strains of constrained lending growth, ongoing funding pressure, ever higher regulatory hurdles, and a transition to new mobile delivery channels and competitors,” Mr Dickinson said.

 

KPMG identified the high cost of funding as a major challenge for the major banks, which narrowed from an average of 229 basis points in the second half of 2011, to 221 basis points in the first half of 2012.

 

 “Sustainable cost reduction remains a challenge for the major banks. While they are implementing a number of cost reduction measures, the full impacts are yet to flow through to the results. They need to make structural, long term changes that will sustain a lower cost base,” said Michelle Hinchliffe, KPMG’s Head of Financial Services.

 

The ROE for the majors is an average of 16.3 percent compared with 16.6 percent half year 2011. “Increased capital requirements from Basel III will continue, and while managing margin pressure remains important, containing costs while improving customer relationships will also feature highly in the majors’ strategy,” Ms Hinchliffe added.

 

Cost of funding continues to serve as the biggest hurdle for the country’s major banks, with uncertainty in global markets contributing to an overall tough market condition.

 

“The global crisis in access to funding has forced the majors ‘back to the past’ where they are wooing domestic deposits to boost their funding. This means deposit competition is intense, and depositors are now being paid 2% more (relative to RBA rates) than before the GFC. It is these increased deposit rates which are now having the strongest impact on bank funding costs.” Mr Dickinson said.